US Daily Economic Notes:What is the index of leading indicators telling us?
Commentary for Friday: As the namesake of the series implies, the indexof leading economic indicators (LEI) is a forward-looking indicator that hashistorically been a decent predictor of real GDP growth. The chart below showsthat the year-over-year change in the LEI leads that of real GDP growth by onequarter. This is one reason why we continue expect a sturdy rebound in economicactivity in the current quarter. Thus far in Q2, the LEI is tracking up 3.5% comparedto a year ago, the highest level since Q3 2015. A simple linear regression of theyear-over-year growth rate of real GDP on the LEI points to 2.6% annual growth offormer in the current quarter, which happens to be consistent with our real GDPforecast of 3%-plus quarterly growth.
The labor market is another reason why we continue to expect above-trendgrowth. When it comes to gauging the health of the labor market, initial joblessclaims are one of the best real-time indicators. In fact, this series is one of thecomponents of the LEI. Yesterday's claims data corresponded to the survey periodfor June employment. The four-week moving average of claims is currently 245k,which is up a negligible 4k from where it was in May. This points to a stillhealthypace of hiring that is consistent with further downward pressure on theunemployment rate over time.
We expect a 165k gain in June nonfarm payrolls, up moderately from its threemonthtrailing average of 121k. In our view, the sturdy growth rate of tax receiptsindicates that job growth may be a bit better than the recent trend. To be sure, weexpected a downshift in the labor market this year after averaging around 190k jobgains per month last year. As we have discussed repeatedly, productivity growthwill have to do the heavy lifting this year with respect to overall GDP growth. Inthis regard, the trends in the regional PMIs bode well.
The fact that business confidence remains elevated also supports our forecastof 3%-plus real GDP growth in the current quarter. The Philadelphia Fed surveyaveraged 29.5 in Q2, which is down a little less than four points from itsQ1 average, but still a very healthy level. Moreover, the six-month outlook forcapital expenditures (capex) in the Philadelphia Fed survey, which is a leadingindicator of nonresidential equipment spending in the GDP accounts, averaged32.6 in the current quarter—the highest level in 33 years. As we outlined in the US Economics Weekly, greater capital deepening would be a major positive forproductivity growth, which has been extremely depressed in the current businesscycle.