The Conference Board its Index of Leading Economic Indicators (LEI) rose 1.2% in May, somewhat better than a consensus expectation for a 1.0% reading and following a 1.1% increase in April. Ken Goldstein, Economist at the Conference Board, stated “The leading economic index increased for the second consecutive month. The coincident economic index is still declining but the declines are less intense. The recession is losing steam. Confidence is rebuilding and financial market volatility is abating. Even the housing market appears to be stabilizing. If these trends continue, expect a slow recovery before the end of the year. However, employment will take longer to turn around.”

Seven components rose, led by supplier deliveries, the interest rate spread (10-year Treasury yield less the Federal Funds rate) and stock prices. These items were somewhat offset by negative readings from the other three components, led by average manufacturing hours worked.

Harmonic Investment Advisors believes that the LEI, which seeks to evaluate the economy’s likely performance 6 months in advance, has historically been a useful tool for forecasting US economic growth. While today’s positive reading reinforces HIA’s expectation of continued economic weakness, Harmonic’s principals are somewhat skeptical that the economy will continue to accelerate at the same pace over the remainder of 2009.

Harmonic integrates the information provided in this release into the macroeconomic models that drive its tactical asset allocation and economic sector weightings and will continue the shift to an incrementally more cyclical stance as the year progresses and when market valuations appear attractive.

Conference Board Index of Leading Economic Indicators May 2004 – May 2009 (vertical line indicates approximate official start of recession)

The Conference Board its Index of Leading Economic Indicators (LEI) rose 1.0% in April, somewhat better than a consensus expectation for a 0.8% reading and following a -0.2% decline in March. Ken Goldstein, Economist at the Conference Board, stated “The leading indicators suggest that while the recession will continue in the near term, the declines will be less intense. The question is how long before declines in activity give way to small increases. If the indicators continue on the current track, that point might be reached in the second half of the year.”

The LEI rose for the first time in 7 months. Seven components rose, led by stock prices, the interest rate spread (10-year Treasury yield less the Federal Funds rate) and consumer expectations. These items were somewhat offset by negative readings from the other three components, led by the real money supply.

Harmonic Investment Advisors believes that the LEI has historically been a useful tool for forecasting US economic growth. While today’s positive reading reinforces HIA’s expectation of continued economic weakness, the release does apparently corroborate Harmonic’s thesis that the US economy will continue to contract during 2009 but that the rate of contraction will subside in the latter months of the year.

Harmonic will be integrating the information provided in this release into the macroeconomic models that drive its tactical asset allocation and economic sector weightings and expects to shift to an incrementally more cyclical stance as the year progresses and when market valuations appear attractive.

Conference Board Index of Leading Economic Indicators April 2004 – April 2009 (vertical line indicates approximate official start of recession)

The Conference Board reported today that the Index of Leading Economic Indicators (LEI) fell 0.4% in February, somewhat better than a consensus expectation for a -0.6% reading and following a revised 0.1% increase in January.  Despite the negative overall figure, the 10-component Index was rather balanced in terms of the readings suggested by its components.  Four components, led by weekly unemployment claims, drove the Index lower. These items offset positive readings from the other six components, led by the interest rate spread (10-year Treasury yield less the Federal Funds rate).

The economy will continue to contract in the near-term

The LEI, intended to forecast the direction of the US economy in the upcoming 1 to 2 quarters, suggests that the economy will continue to contract in the near-term.

Harmonic Investment Advisors believes that the LEI has historically been a useful tool for forecasting US economic growth and that today’s negative reading, driven by unemployment, reinforces HIA’s expectation of continued economic weakness.  Harmonic continues to expect the US economy to contract during all of 2009 but notes that the rough balance between number of positive and negative components offers hope that the rate of economic decline is lessening.

As reported by the Conference Board the Index of Leading Economic Indicators (LEI) rose 0.3% in December 2008 from November 2008. This increase outpaced the consensus expectation for a -0.2% reading and followed a -0.4% posting in November. The 10-component Index was driven unexpectedly higher largely by a continued increase in the M2 Monetary Supply, which has seen a sharp rise as the Federal Reserve has lowered the Fed Funds rate and other monetary stimulus, such as the TARP, has been injected in recent months. Today’s reading was the first increase in 6 months.

Other Index components, including Building Permits, Average Workweek, Jobless Claims and Pace of Deliveries posted substantially negative readings for the month of December.

The LEI, intended to forecast the direction of the US economy in the upcoming 1 to 2 quarters, suggests that, absent the potential positive benefits from the dramatic increase in the monetary base, the economy will continue to contract in the near-term.

Harmonic Investment Advisors believes that while the LEI has been a historically good tool for forecasting US economic growth, today’s positive reading, driven by the expansion in the M2 Monetary Supply, is misleading. Although growth in the monetary base has historically been a precursor to increased lending and therefore economic activity, the current weakened state of the US financial system has rendered that transmission mechanism ineffective. Harmonic expects the US economy to contract during all of 2009, beginning with a sharp decline in 1Q09 GDP.