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What is the LEI?
The Leading Economic Index (LEI) is an index published by the Conference Board, a not-for-profit research organization. LEI is an index comprised of ten economic components with the goal as an indicator for future performance of the overall economy. The components cover a wide range of economic activity, including job growth, housing construction, and stock prices.
This index is a predictive indicator that anticipates the business cycle by approximately seven months. Historically the index has turned downward before a recession and moved higher before an economic expansion. The LEI is reported the third week of every month.
Components of the LEI
The Leading Economic Index is comprised of ten individual economic components.
LEI results for December 2024
The December 2024 release of 101.60 showed a slight decrease from November 101.70. The six-month change had the LEI down by 1.3% over the second half of 2024, slightly less than its 1.7% decline over the first half of the last year.
“The Index fell slightly in December failing to sustain November’s increase,” said Justyna Zabinska-La Monica, Senior Manager, Business Cycle Indicators, at The Conference Board. “Low consumer confidence about future business conditions, still relatively weak manufacturing orders, an increase in initial claims for unemployment, and a decline in building permits contributed to the decline. Still, half of the 10 components of the index contributed positively in December. Moreover, the LEI’s six-month and twelve-month growth rates were less negative, signaling fewer headwinds to US economic activity ahead. Nonetheless, we expect growth momentum to remain strong to start the year and US real GDP to expand by 2.3% in 2025.”
Leading Economic Indicator (LEI) Recent 12 Months
Leading Economic Indicator (LEI) Components for December 2024 and Six Months ending December 2024
Historical Correlation Between the LEI and Recessions
Historically, the LEI tends to consistently move down before a recession. It is for this reason economists and investors view the LEI as a consistent indicator of economy slowdowns. One example of this is before the recession in 2007-2009. In the chart below one can note the LEI began to drop in 2006. The chart also shows the same trend before the 2001 recession where the LEI moved downward beginning in 2000.
The LEI as a predictor of a recession
CHART DESCRIPTION: The chart illustrates the so-called 3Ds—duration, depth, and diffusion—for interpreting a downward movement in the LEI. Duration refers to how long the decline has lasted. Depth denotes the size of decline. Duration and depth are measured by the rate of change of the index over the most recent six months. Diffusion is a measure of how widespread the decline is among the LEI’s component indicators—on a scale of 0 to 100, a diffusion index reading below 50 indicates most components are weakening.
The 3Ds rule signals an impending recession when: 1) the six-month diffusion index lies below 50, shown by the black warning signal lines in the chart; and 2) the LEI’s six-month rate of decline falls below the threshold of −4.4%. The red recession signal lines indicate months when both criteria are met simultaneously—and thus that a recession is likely imminent or underway.
LEI and the aftermath of Covid
While the LEI is considered a reliable indicator for the future direction of the economy the index has had some inconsistencies recently as the economy moves post Covid. From March 2022 through December 2023 the LEI decreased 22 consecutive months even though GDP has increased over the most recent 12 months. During this time the LEI continued to signal a recession, yet the most recent reading in December 2024 indicated a milder pace of contraction and broad-based improvements in the index’s components. It has been argued by some that the LEI is not relevant any longer. However, the business cycle following Covid has been unusual.
According to Mark Hackett Chief Market Strategist, Nationwide Investment Management Group, “The Index dropped 5% in November 2022, and a recession has not materialized. One possible explanation may be the unique nature of the post-pandemic economy. The unusual impact of COVID-19 on the economy has likely resulted in data inconsistencies, policy distortions, and cycle anomalies, which have, in turn, affected the LEI components.”
“Second, investors should consider that the LEI is impacted more by manufacturing data and less by services, which drive 70% of the U.S. economy. Lastly, for much of 2023, the divergence between Gross Domestic Product (GDP) growth and the LEI stemmed from weaker sentiment data, while the hard data proved more resilient. As a case in point, consider the robust 4.9% GDP report for the 3rd quarter. Again, this highlights the discord in economic data that has plagued forecasts since 2020.”
“The incremental improvements in December’s LEI report suggest that the likelihood of an economic downturn is fading, potentially lending credence to the Index’s detractors. However, it’s also possible that the LEI has been accurate all along, and the Index’s negative readings signaled a recession during Q1 of 2023. Still, the National Bureau of Economic Research (the official arbiter of U.S. recessions) didn’t pick up on it because of the unorthodox nature of the post-pandemic business cycle.”
Historical LEI January 2015 through December 2024
Conclusion
Businesses need to keep up to date on the future direction of the economy for future planning and expenditures. One tool to help navigate planning for the future is the Leading Economic Index. This index is unique in that it is forward looking by considering ten different measures. The main benefit of this index is the ability to predict turning points in the economy such as recessions and expansions. Used along with other indexes and measures businesses can be informed on changes in the economy to help guide their business decisions.
—Tom Schaefges, St. Onge Company
