Is It Time to Take the Economy Off Life Support?
The pulse of the economy is throbbing, if the latest economic indicators are anything to go by. The Conference Board’s Leading Economic Index (LEI) and Coincident Economic Index (CEI), which measure the overall health of the economy, are showing the kind of growth that could get the economy off its medication sooner rather than later.
The Conference Board’s Leading Economic Index for the U.S. increased for the fifth consecutive month in June. An increase in the leading indicators, or LEI, means that economic activity is likely to accelerate in the coming months; vice versa for a decrease. A leading indicator generally precedes shifts in economic activity, so these indicators have a predictive value.
In the first half of this year, the leading economic index increased 2.7 percent (about a 5.5 percent annual rate), though it was slower than the growth of 3.5 percent (about a 7.2 percent annual rate) during the second half of 2013. Six of the 10 indicators that make up the Conference Board LEI for the U.S. increased in June.
The positive contributors were indicators like the Leading Credit Index, stock prices, the ISM new orders index, manufacturers’ new orders for non-defense capital goods excluding aircraft, and manufacturers’ new orders for consumer goods and materials. The negative contributors were building permits, average weekly manufacturing hours, and average weekly initial claims for unemployment insurance. The LEI for the U.S. increased 0.7 percent in May and 0.3 percent in April.
Independently, the Institute for Supply Management’s new orders index climbed 2 points to 58.9 percent from 56.9 percent in June. The Dow Jones Industrial Average, an indicator of how equities have performed, has also gained about 3.13 percent since January this year, indicating investors’ belief that economic growth will pick up pace in the second half of this year.
More importantly, the Conference Board Coincident Economic Index (CEI), a measure of current economic activity for the U.S., also showed broad-based increases in June.
The index rose 1.3 percent (about a 2.6 percent annual rate) between December 2013 and June 2014, slightly faster than the growth of 1 percent (about a 2.1 percent annual rate) for the same period last year. All four indicators that make up the CEI for the U.S. increased in June. The largest positive contributors were the number of employees on nonagricultural payrolls, personal income less transfer payments, industrial production, and manufacturing and trade sales.
Just to shed some light on how these CEI indicators actually performed, the economy added 288,000 jobs in June, bringing down the unemployment rate to 6.1 percent from 6.3 percent in April and May. According to data published by the Bureau of Economic Analysis, private wages and salaries increased $27.8 billion in May, compared with an increase of $17.9 billion in April, and disposable personal income (DPI) increased $55.6 billion, or 0.4 percent, in May.
Data released by the Federal Reserve last week showed that the index for industrial production increased by 0.2 percentage points on the month and by 4.3 percentage points on the year in June to 103.9 (the index year is 2007). Manufacturing, which contributes about 75 percent of total production, was up 0.1 point on the month and 6.7 points on the year. Overall, the index for industrial production increased 5.5 points in the second quarter, led primarily by growth in mining activities.
Solid improvement in both predicative and current indicators of economy may push the Fed to believe that the time to take the economy off its monetary life support in the form of easy liquidity and policy accommodation is nearing.