Leading Economic Indicators do not signal an end to the recession

by | Jun 24, 2009 | Forecasting

Claus Vogt, manager of the Weiss Million Dollar Portfolio, discussed reasons for why the LEI is not pointing to an economic recovery. While mainstream financial experts may have us believe that “the green shoots are showing signs of soaking up that strong, late spring sunshine” and the recession is easing based on the recent LEI, Vogt argues that some of the key indicators have not yet signaled a recovery.

The LEI is a weighted average of 10 components. They can be split into financial variables, survey variables, and economic variables. This distinction is important, especially during the current cycle …

That’s because the current cycle is the result of a huge real estate bubble. And financial history teaches us that monetary policy loses a lot of its effectiveness when a bubble bursts. So it makes a lot of sense to have a closer look at the LEI’s components.

Here’s what I’ve found:

Financial and survey variables were fully responsible for the positive LEI during the last two months. Whereas the five economic variables made no positive contributions at all! Collectively, average hours worked, jobless claims, real consumer goods orders, real core capital goods orders, and building permits were even slightly negative.

Historically, an ending recession was preceded by the economic variables joining the positive development of the other variables. Hence I caution you not to become too bullish on the economy just yet.

Read full article here…

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