Today, one of the best measurements of the strength of the economy-the Leading Economic Index-showed a decline in April of 0.1 percent, in contrast to March’s 0.3 percent increase and also February’s 0.7 percent increase. A declining Leading Economic Index has predicted 7 of the last 8 recessions, but this does provide a signal of possible slowdown which could lead to falling commercial real estate prices; however, that could be followed by lower interest rates due to a lower demand to borrow money, since interest rates are nothing more that the intersection of the demand and supply for money.
Today’s news release and analysis of the leading indicators is prepared by the Conference Board, which is not a government agency, but a 501 (c)(3) non-profit association of business members. The index is based on a scale where the year 2004 is 100. Today’s number is 95.5, and the chart below shows the indicator since 1960 with the shaded areas as recessions. Notice the shaded area for 2008 which illustrates how sharp and severe the recession was.
The Leading Economic Index is composed of the following individual indicators:
- Average weekly hours, manufacturing
- Average weekly initial claims for unemployment insurance
- Manufacturers’ new orders, consumer goods and materials
- ISM Index of New Orders
- Manufacturers’ new orders, non-defense capital goods excluding aircraft orders
- Building permits, new private housing units
- Stock prices, 500 common stocks
- Leading Credit Index™
- Interest rate spread, 10-year Treasury bonds less federal funds
- Average consumer expectations for business conditions
To confirm a change in the direction of the economy, we also look at the Coincident Economic Index, and the chart below shows how both indexes accurately predicted recessions the last 12 years, with the Leading Economic Index trending down long before the recession started, and trending up slightly before the recession ends.
There are four economic statistics comprising the Coincident Economic Index:
- Number of employees on non-agricultural payrolls
- Personal income less transfer payments
- Industrial production
- Manufacturing and trade sale
In summary, watch the next few months of data and should we see further weakness, prepare for lower commercial real estate prices, a slowing economy around the time of the presidential elections causing havoc for incumbents, but also lower interest rates.