Let's start with a look of the latest LEI release:
The Conference Board Leading Economic Index® (LEI)
for the U.S. declined 0.1 percent in March to 94.7 (2004 = 100),
following a 0.5 percent increase in February, and a 0.5 percent increase
Says Ataman Ozyildirim, economist at The Conference Board: “After
three consecutive gains, the U.S. LEI dipped slightly in March, with
equally balanced strengths and weaknesses among its components. The
leading indicator still points to a continuing but slow growth
environment. Weakness in consumer expectations and housing permits was
offset by the positive interest rate spread and other financial
components. Meanwhile, the coincident economic index, a measure of
current conditions, is down since December due to a large decline in
Says Ken Goldstein, economist at The Conference Board: “Data for
March reflect an economy that has lost some steam. In addition to
headwinds from government spending cuts, the private sector economy may
struggle to maintain its momentum. The biggest challenge remains weak
demand, due to nervous consumer sentiment and slow income growth.”
Let's look at the data in more detail, first by focusing on the components:
The biggest contributor is average weekly manufacturing hours. The assumption here is that more production means strong demand for goods. This is healthy regardless of the cause -- it doesn't matter if it's strong business demand (fixed investment) or consumer demand (increased consumption). The ISM new orders index is the next largest component, which also plays into the manufacturing theme: and increase in new orders means increased demand. Next is consumer expectations. An increase here indicates the potential for increased consumption, while the interest rate spread tells us about the condition in the treasury market and what traders think about the state of growth.
Overall, the readings over the last 7 months have been positive. There has been one month with a 0 reading and this month's -.1 reading.
As noted in the press release, 5 components were negative while five were positive -- not exactly the type of readings we'd like to see in this figure. Also note two things: 1.) the ISM new orders index has printed negative readings in 5 of the last six months and the average consumer expectations for business conditions have been negative for the last 6 months. Neither of these developments is good.
In addition, we also had the Beige Book release on Wednesday. Here's the summation from that report:
Reports from the twelve Federal Reserve Districts suggest overall
economic activity expanded at a moderate pace during the reporting
period from late February to early April. Activity in the Cleveland,
Richmond, St. Louis, Minneapolis, and Kansas City Districts was
characterized as growing at a moderate pace, while the Boston,
Philadelphia, Atlanta, Chicago, and San Francisco Districts noted modest
growth. The New York and Dallas Districts indicated that the pace of
expansion accelerated slightly since the previous Beige Book.
Most Districts noted increases in manufacturing activity since
the previous report. Particular strength was seen in industries tied to
residential construction and automobiles, while several Districts
reported uncertainty or weakness in defense-related sectors. Consumer
spending grew modestly, and firms in some Districts cited higher
gasoline prices, expiration of the payroll tax cut, and winter weather
as factors restraining sales growth. Retailers in several Districts
expect continued sales growth in the near term. Overall vehicle sales
remained strong or increased, but sales of used automobiles declined in
some Districts. Travel and tourism expanded across most reporting
Districts, boosted by both business and leisure travel.
Demand for nonfinancial services increased at a modest pace, and
several Districts noted growth in freight and transportation services.
Most Districts said residential and commercial real estate improved
markedly since the last report. Home prices were rising in many areas of
the country. Loan demand was steady to slightly up in most Districts.
Reports on agricultural conditions were mixed, as drought or cold
weather adversely impacted some Districts while others reported a strong
agricultural sector. Oil and natural gas activity remained robust over
the reporting period, with contacts in the Cleveland, Kansas City, and
Dallas Districts expecting a rise in activity in coming months, while
coal production continued to decline.
Employment conditions remained unchanged or improved somewhat,
and reports of hiring were most prevalent in the manufacturing,
residential construction, information technology, and professional
services sectors. Wage pressures were generally contained, although
several Districts cited upward pressures in occupations experiencing
labor shortages, such as information technology, construction, and
engineering. Aside from reports of increases in home prices and
residential construction materials, price pressures remained mostly
subdued across Districts.
Outlooks among respondents remained optimistic across sectors and
Districts, with growth mostly expected to continue at the same or a
slightly improved pace. Some uncertainty remained, primarily regarding
fiscal policy and health care reform.
A few observations:
1.) Manufacturing is still growing - always a good sign
2.) The housing rebound appears to be picking up steam. This is without a doubt the best piece of economic news in the report.
3.) Car sales are still strong -- also a healthy sign for consumers.
4.) The payroll tax cut is dampening demand.
5.) It's always good to hear about freight demand increasing; growing economies always need to move goods from point A to point B.
6.) Once again, we see the word "moderate" used to describe the economy.
For the longest time now, the Federal Reserve has continually used the word "moderate" in the Beige Book reports to describe the current expansion. And they're right.