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Going Sideways

Sep 27, 2010 | By: Mr_Blue | Tags: economy, leading economic indicators, lei

According to the latest release of the Conference Board’s Leading Economic Index (LEI) that’s the direction our economy is heading. LEI increased 0.3 percent - pretty weak but still positive. All is NOT well despite what LEI is saying.

What is LEI?

LEI is a weighted index of economic indicators published by the Conference Board but not just any indicators - LEADING indicators. Leading economic indicators typically move up or down BEFORE a change in a business cycle (ie. growth or recession). The following is a list of leading economic indicators and their weights as published by the Conference Board:

Here’s a graph of LEI over time:

The blue line is the LEI and red line is the Coincident Economic Index (CEI). Both indices show very little growth progress for our economy. Actually here are a few quotes from The Conference Board economists regarding LEI:

Ken Goldstein:

“While the recession officially ended in June 2009, the recent pace of growth has been disappointingly slow, fueling concern that the economic recovery could fade and the U.S. could slide back into recession. However, latest data from the U.S. LEI suggest little change in economic conditions over the next few months. Expect more of the same – a weak economy with little forward momentum through 2010 and early 2011.”

Ataman Ozyildirim:

“The U.S. LEI, which began rising three months before the end of the recession, remains on a general upward trend. However, the pace has been slowing. Correspondingly, current economic conditions, as measured by The Conference Board CEI, have been essentially flat since May, after reaching a bottom in June 2009. Taken together, the composite indexes are consistent with a slowly expanding economy in the near term.”

Both economists don’t sound very confident about future growth.

Going sideways isn’t necessarily a good thing particularly when we have such high unemployment/underemployment. Our economy needs significant growth (typically above 3% GDP growth) to generate jobs. According to LEI this will not happen this year and possibly next.

This New Normal of low growth and high unemployment doesn’t have to happen. But it will because policy makers in Washington simply don’t get it. This issue is demand - demand for products and services. That’s what will drive economic growth. But demand doesn’t just create itself when the business sector and households are trying to repair their own balance sheets. It has to come from government fiscal policy (taxing and spending policy) but just any fiscal policy.

All this talk of tax cuts and tax credits for businesses and top incomes won’t cut it. We need policies that focus on people and jobs whether in the form of payroll tax holiday for workers, to investments in infrastructure, to a direct jobs program. We are just wasting our time and resources on tax cuts and tax credits.

Good luck.