Composite Index of Leading Indicators

What Is the Composite Index of Leading Indicators?

The Composite Index of Leading Indicators, otherwise known as the Leading Economic Index (LEI), is an index published monthly by The Conference Board. It is used to predict the direction of global economic movements in future months. The index is composed of 10 economic components whose changes tend to precede changes in the overall economy. Businesses and investors can use the index to help plan their activities around the expected performance of the economy and protect themselves from economic downturns. 

Understanding Composite Index of Leading Indicators

LEI is intended to give an overall indication of the near-term future performance of the U.S. economy. It includes key economic data that is logically connected to the economic conditions that influence things like consumer spending and business investment. For example, one component of the LEI measures new applications for unemployment benefits, which is thought to indicate increases or decreases in unemployment. Changes in unemployment in turn suggest changes in future consumer and business spending. 

By combining data from multiple different sources into a composite index, the LEI can give a more comprehensive signal to help predict overall economic performance, as opposed to a single indicator. Items are included in the index based on their logical relationship to the economy, their properties as leading indicators, and their ease of interpretation. The 10 components of the LEI are:

1. Average weekly hours worked by manufacturing workers indicates both consumer income and business demand for labor to engage in ongoing production.
2. Average number of initial applications for unemployment insurance indicates possible changes in unemployment, which reflects the level of business activity and impacts consumer income. 
3. The volume of manufacturers' new orders for consumer goods and materials indicates businesses' short term operational spending. 
4. The new orders index (from the Institute for Supply Management PMI), which indicates whether orders for various manufactured goods are increasing or decreasing.
5. The volume of new orders for capital goods (except aircraft), unrelated to defense, indicates business plans for longer-term future production involving durable capital.
6. The number of new building permits for residential buildings indicates future spending on construction projects.
7. The S&P 500 stock index, which indicates the total value of the business sector and the nominal wealth of stock holders in the economy.
8. The inflation-adjusted monetary supply (M2) indicates the purchasing power of highly liquid assets available in the financial system for business and consumer borrowing and spending.
9. The spread between long and short interest rates, which indicates bond market participants expectations for future performance of the economy.
10. Average consumer expectations for business conditions indicate forward-looking consumer sentiment for the next six to 12 months.

The Composite Index of Leading Indicators is a number used by many economic participants to predict what will happen with the economy in the near future. By analyzing the index in relation to the business cycle and general economic conditions, investors and businesses develop expectations for the future economic environment and can make better-informed decisions.