The Conference Board’s Leading Economic Index fell slightly (-0.1%) in March. It was the first decline since last summer. Don’t worry, however, Conference Board economist Ataman Ozyildirim helpfully notes that, “the U.S. LEI dipped slightly in March, with equally balanced strengths and weaknesses among its components. The leading indicator still points to a continuing but slow growth environment.”

Looking further into the detail, that is indeed the case. Of the ten subcomponents, five were negative and five were positive.

The negative:

Average Workweek, Production Workers (-.07)
Average Weekly Initial Claims, State Unemployment (-.04)
ISM New Orders Index (-.08)
Building Permits (-.13)
Avg Consumer Expectations for Business Conditions (-.14)

The positive:

Manufacturer’s New Orders, Consumer Goods and Materials (+.01)
Manufacturer’s New Orders, Nondefense Capital Goods ex Air (+.02)
Stock Prices, 500 Common Stocks (+.10)
Leading Credit Index (+.11)
TED Spread (+.20)

Add all these up and you get a small decline in the index. However, there is a decided imbalance on exactly which segments ended up on the plus or minus side. The subcomponents on the negative side are largely real economic factors, while the bulk of those on the positive side are financial indications (and the new orders components are both imputations).

For mainstream economists, including those that created and maintain this set of “leading” indicators, monetary policy is still the primary input. Stock prices, credit usage and interest rate spreads are all indications of “successful” monetary policy in the pursuit of the ephemeral “wealth effect”. By these calculations, if the Fed is effective at reducing interest rates and spreads, the economy is expected to pick up without any qualification.

You can understand why this process would be incorporated into the design by the Conference Board since credit production was a crucial part of the economic pattern prior to 2007. However, in the wake of the Great Recession, there is every indication that this relationship between credit, banking and the wealth effect has undergone a paradigm shift. Credit is the opposite of plentiful in the consumer segment (outside of student loans), while bank spreads are driving financial firms to “invest” funds in securities and speculative activities rather than loans, and stock prices have had little impact on the exhausting consumer.

This construct is not unique to the Conference Board. A look inside the Federal Reserve’s primary statistical modeling tool, ferbus, reveals much the same assumptions. Monetary policy is expected to work because it is assumed it works every time. In other words, these economists have made the supposition that the current economic system is little changed from the economic system that existed prior to 2007. I doubt anyone outside the economist profession would agree.

What I have seen in actual data is incongruous with the “leading” indicators as presented. However, if we adjust the Conference Board’s Leading Indicators series for what I would consider a more realistic interpretation of the economic system today (removing the financial/monetary components), the indicator would have been slightly negative in four of the five months prior to March 2013, rather than positive in all of them. That would mean five declines total out of the past six months (with March’s reading somewhere around -.5%), results far more in line with recent data.

The “headwinds” aren’t mysterious at all, it’s the “tailwinds” that are fantasy.

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