This morning the Conference Board released the December report on Composite Indexes of Leading, Coincident, and Lagging Indicators.

The composite indexes are the key elements in an analytic system designed to signal peaks and troughs in the business cycle. Historically, the cyclical turning points in the leading index have occurred before those in aggregate economic activity, while the cyclical turning points in the coincident index have occurred at about the same time as those in aggregate economic activity. The cyclical turning points in the lagging index generally have occurred after those in aggregate economic activity.

In December, the leading index (LEI) ticked upward by 0.2% to 100.7, the first rise in four months. Eleven indicators are combined together to create the LEI. Of these, eight rose in December, two declined, and one was not yet available due to the government shutdowns in recent months. The largest negative contribution was made by the sensitive materials price index. This is a kind of bad news/good news indicator. Declines in the indicator are interpreted negatively in terms of future economic growth. But, the downward trend in this index since last August indicates that inflation is still in check.

Even though the LEI advanced slightly in December, the longer-term trend of this index is still negative. For the twelve months of 1995, the index rose three times, declined eight times, and was unchanged once. The index peaked at 102.6 in December 1994 and since then has declined to the current level of 100.7.

The composite index of coincident indicators (CEI) could not presently be calculated for December. Again, this was due to data that was not yet available because of the government shutdowns. But, since the last composite index report, data was collected that enabled the CEI to be calculated up to November. During the first eleven months of 1995, the CEI rose 8 times and declined 3 times. The index rose in each of the four months leading up to November. From December of 1994 to November 1995 the index rose from 116.8 to 118.5 -- an annualized rate of 1.9%. This compares with a 5.0% CEI growth rate during 1994.

The composite index of lagging indicators could not be computed for December because data was not yet available for three of its seven components. But, since the last monthly report, data was assembled that allowed the lagging index to be calculated up through November. In November the lagging index dropped by 0.1%, the first decline in 20 months. Over the most-recent five months the lagging index has noticably flattened. From July through September, the index was unchanged. In October it rose 0.2% and, in November, it dropped 0.1%.

What are the three indexes telling us at this time?

The LEI has been trending downward for 12 months. For the last six recessions, the downturn in the LEI led the official start of the recession by 11, 11, 9, 15, 8, and 18 months. Based on this, the leading index could be telling us that we are already from one to four months into a recession.

The lagging index has flattened considerably over the last 5 months; but, is still showing a tiny bias to the upside. For the past six recessions, the downturn in the lagging index lagged the onset of five of the recessions by 3, 3, 13, 3, and 3 months. For the most-recent 1990-91 recession, the downturn in the index led the recession by 8 months. If the lagging index were to drop a couple tenths from its present level it could be indicating that we are from three to thirteen months into a recession.

The coincident index is currently growing slowly. For the last six recessions, the downturn in the CEI led the recession onset on three occasions by 1, 2, and 3 months. On two occasions the CEI was coincident with the start of the recession. On one occasion the CEI lagged the start of the recession by 1 month. The coincident index has been trending upward and has risen in each of the most recent 4 months. We need to keep a close watch on the coincident index and its four component indicators. If the CEI breaks down, we may well be recession bound. Let's hope that all the current data will be available when the next report comes out on March 4.

Byline: Lafferty (MF Merlin)