The Piton Investment Team reviews economic data at least weekly. When some data seem at variance with much comparable data, the team tries to investigate what lies behind the variance, to assess whether the majority of the data reflects trends more accurately than the outlier.
One example of a data set that the team explored is the Conference Board Leading Economic Index® (LEI). As the board says of the LEI: “The Leading Economic Index (LEI) provides an early indication of significant turning points in the business cycle and where the economy is heading in the near term” (https://www.conference-board.org/topics/us-leading-indicators/). For decades, the LEI did seem to correspond to upcoming recessions, as defined by the National Bureau of Economic Research (NBER, https://www.nber.org). As the chart below shows, however, over the last few years the LEI has been negative, traditionally a harbinger of recession, but a subsequent recession has yet to materialize.
The Piton Investment Team cannot predict the future of the economy and they do not know more about the Conference Board’s methods than they make public. The team has discussed, however, whether the components that compose the Index could be adjusted for better results. The column to the right above shows these components and their weighting in the LEI. In this chart, the “Consumer Expectations” component is negative. Now, there can be logic in including this component, in that, if consumers feel negatively about the economy, they might spend less, which in turn would be a drag on some segments of the economy. But what if that has not been the case recently? Although a metric like the Index of Consumer Sentiment fell to a record low in March (https://www.sca.isr.umich.edu), consumer retail sales, for example, increased during the same period (as measured by the Census bureau, https://www.census.gov/retail/sales.html). If the LEI data do not capture this divergence, the negative sentiment recorded for consumers could be less reliable as an indicator of the future direction of the economy.
In view of analyses like this, the Piton Investment Team still monitors the LEI, but it does not view it as one of the more reliable harbingers of the future of the U.S. economy. As you know from this blog, the Team regularly consults other sources of data as well, so that they have a context for their explorations into the specifics of companies that they anticipate can flourish in upcoming economic conditions. Contrary to the indicators of the LEI, the Team does not anticipate those conditions soon veering toward a recession.