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Things could be worse than they appear but it’s not a leading anything.

Today the Conference Board's Leading Economic Index declined by 0.2 and has now declined for two of the last three months.  Upon further review, things could actually be worse that they appear.  The movements of the sub-components of the index were very mixed, with four of the components declining, five rising and one flat.

The rising components during June (in order of positive contribution):

(1)    The yield curve

(2)    Building permits

(3)    Index of consumer expectations

(4)    Manufacturers’ new orders (consumer goods and materials)

At this point in the economic cycle, the yield curve is somewhat meaningless.  The yield curve has been sending a strong growth signal continuously since 2008, but there is no expansion in credit and low mortgage rates are not stimulating home sales.  A favorable yield curve is not providing the kind of stimulus that has occurred historically at similar interest rate levels.

The rising consumer expectations number is in sharp contrast to the Conference Board’s June 29th report on consumer confidence, which showed a sharp drop in confidence.  How can the same organization show consumer confidence rising and falling the same month?

In addition, a good part of the index is subject to changes and given the recent softness in the MACRO data, we are not likely to see upward revisions.  The press release from the conference board states, “the resulting indexes are therefore constructed using real and estimated data, and will be revised as the unavailable data during the time of publication become available.”

Today’s surging S&P is on the back of strong earnings from a number of companies.  At the time of writing, 40 of the 52 companies due to report today have reported (the others are reporting post-market) and only 2 missed in the earnings line and 10 missed on the revenue line.   For now, the negative news on jobs, housing and the supposed leading indicator are taking a back seat.

Howard Penney

Managing Director

THE MACRO MIXER - When LEADING is LAGGING or just meaningless - 1