This morning the Conference Board released the January report on Composite Indexes of Leading, Coincident, and Lagging Economic 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 January, the leading index (LEI) decreased by 0.5 percent to 100.2, the lowest value since November 1993. Eleven indicators are combined together to create the LEI. Of these, five rose in January, and six declined. The largest negative contribution was made by the average work week indicator which fell to its lowest value in over 12 years. For the first time in several months, the stock price indicator made a negative, but very slight, contribution to the index. The change in sensitive materials prices index, which has been leading the downward LEI move for many months, was less negative in January than in December and, thus, made a positive contribution to the January LEI reading.

The trend of the LEI is negative. In the last twelve months, the index rose three times, and declined nine times. The index peaked at 102.6 in December 1994 and since then has declined to the current level of 100.2.

The composite index of coincident indicators (CEI) increased by 0.3 percent in December and decreased by the same amount in January. During the most recent 12 months the CEI rose 7 times, declined 4 times, and was unchanged once. In the past 12 months the index rose from 117 to 118.5 -- an annualized rate of 1.3 percent. This compares with a 5.0 percent CEI growth rate during 1994.

The composite index of lagging indicators increased by 0.3 percent in December and was unchanged in January. The November change was revised downward from - 0.1 percent to -0.2 percent, the only decline in the past 22 months. Over the most-recent seven months the lagging index has noticably flattened. From July through September, the index was unchanged. In October it rose 0.2 percent, in November it dropped 0.2 percent, in December it gained 0.3 percent, and in January it was unchanged.

What are the three indexes telling us at this time?

The LEI has been trending downward for 13 months. I went into the archives and dusted off one of my many quaint and curious volumes of forgotten lore (The Commerce Department's Business Conditions Digest for October 1978) and determined that for the last eight recessions, the downturn in the LEI led the official start of the recession by 4, 23, 11, 11, 9, 15, 8, and 18 months. Based on this, the leading index seems to be telling us that the odds are 5 to 3 that we are already from two to nine months into a recession.

The lagging index has flattened considerably over the last 7 months; but, is still showing a tiny bias to the upside. For the past nine recessions, the downturn in the lagging index lagged the onset of 8 of the recessions by 3, 2, 1, 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 from its present level it could be indicating that we are from one to thirteen months into a recession.

The coincident index is currently growing slowly. For the last nine recessions, the downturn in the CEI led the recession onset on six occasions by 1, 2, 6, 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. Although the coincident index decreased in January, it increased in 5 out of the six months preceding January. In the past six months the CEI is up 1.1 percent. 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. But, so far, the trend is biased slightly to the upside.

In other news, the Labor Department announced today that new claims for unemployment insurance increased by 6,000 to 363,000 during the week ending March 2. The four-week moving average of new claims fell to 370,750, the lowest level in a month. But, a plot of the four-week average over the past six months shows that it has consistently made higher highs and higher lows. In other words, it is trending upward. In the past twelve months the four-week moving average has advanced by 9.45 percent.

Tomorrow the Labor Department is scheduled to release its Employment Situation report for the entire month of February.

Byline: Lafferty (MF Merlin)