Leading Indicators Show Tempered Optimism for Economy

On Thursday, October 21, the Conference Board released its September 2021 report detailing the latest reading for the Leading Economic Index (LEI), a composite of ten data series that tend to lead changes in economic activity. Many economic data points are backward-looking, but we pay special attention to the LEI, as it has a forward-looking tilt to it and spans many segments of the economy. The index grew 0.2% month over month, the lowest reading since February and slightly below expectations for 0.4%. This does, however, mark the seventh consecutive month the index has risen.

“September’s LEI number plays into our view of an economy transitioning to mid cycle ,” said LPL Financial Chief Investment Strategist Ryan Detrick. “A mid-cycle economy tends to be bumpier than early cycle with more uncertainties on the horizon, but we expect near-term issues to resolve themselves giving way to the next leg of sustained growth.”

As seen in the LPL Chart of the Day, the LEI’s growth rate has slowed since early summer.

60% of the underlying component indexes rose in September, representing still-strong breadth even if that percentage fell from last month’s 80%. The Institute for Supply Management (ISM) New Orders Index, interest rate spread, and average weekly initial claims for unemployment insurance represented the three largest positive contributors. Building permits represented the largest drag on the index.

We continue to see strength on the demand side of the economic equation, supporting our belief that the economy will remain strong over the long-term. Supply has taken longer to come back online during this recovery because of widely publicized supply chain issues and still-elevated COVID-19 cases, exacerbated by poor weather. These issues will likely take some time to resolve themselves, but they are good problems to have compared to weak demand. We are starting to see evidence of “peak bottleneck,” suggesting economic activity may soon start to get a lift from improvement on the supply side.

Looking out into 2022, we anticipate healthy consumer balance sheets and strong wage growth will buoy the U.S. consumer, while businesses will likely invest more heavily in productivity-enhancing capital expenditures to meet that strong demand, potentially leading to above-average economic growth next year.

Much more on our economic outlook for next year coming soon in our Outlook 2022 publication in early December.


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