With increased concerns about the Delta variant, high inflation, and recent misses on economic data, it can be easy to forget that we’re still in the middle of a robust economic recovery and leading indicators continue to support a positive outlook. On Thursday, August 19, the Conference Board released its July 2021 report detailing the latest reading of its Leading Economic Index (LEI), a composite of ten data series that tend to lead changes in economic activity. The index rose 0.9% month over month in July, accelerating from June and ahead of the consensus expectation, signaling strong potential for continued solid growth. Breadth was also robust, with all 10 components contributing to index gains for the first time since March 2021.
As shown in the LPL Chart of the Day, year-over-year growth in the LEI, currently at 10.6%, has only had stretches of 10% growth four times before. With a likely decline to below 10% year-over-year growth just ahead, what’s happened in the past when the LEI has crossed below this key level? Typically, the start of the next recession has still been a good ways off, with the economy continuing to expand for an average of over four more years. 1973 did see a recession within a year, but the other three times there was still a healthy period of solid economic growth ahead.
“While economic data has surprised to the downside recently, July leading indicators continue to signal a positive outlook,” said LPL Financial Chief Market Strategist Ryan Detrick. “August numbers may be more challenging due to the impact of the Delta variant, but with all 10 components of the Conference Board’s LEI contributing to gains in July, the economy will likely be able to endure a weak patch in some segments.”
July’s index gains were led by the Institute for Supply Management (ISM) manufacturing New Orders Index, the Leading Credit Index, and the yield curve, while initial jobless claims made only a slight positive contribution. Near-term headwinds from the Delta variant may push some third-quarter economic growth expectations into the fourth quarter, but with extremely strong job gains over the last two months and leading indicators signaling the potential for continued economic momentum, we still consider the overall economic backdrop supportive for stocks.
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