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Chart Of The Day: Coincident To Lagging Ratio

  • Written by Syndicated Publisher No Comments Comments
    July 22, 2013

    The Conference Board recently released their June index of leading economic indicators which showed no change from the previous month.  The big drags on the LEI in June was the decline in the stock market and the rise in interest rates.  However, the recent drop in the June building permits is raising questions over the housing sector and will likely negatively impact the July reading if they do not turn around in the next report.  The rally of the stock market, which is one of the largest contributing components to the index, will be a net positive for the index in July along with credit activity which has been surging as costs of living increase as wages remain stagnant.

    The negative to the report really came in the lagging index which increased 0.3%, which was higher than the 0.2% increase in the coincident index, which points to a slowing in the pace of ongoing economic growth.   The chart of the day is the coincident to lagging ratio (CLR) which is like a book-to-bill for the economy.  Historically readings below 91 have usually been coincident with an economy about to enter, or is already in, an economic recession.   Currently, that ratio is sitting at the lowest level since September of 2009 at 89.05.

    LEI-Coincident-To-Lagging-071813

    There is historically a fairly tight consistency between the ebb and flow of the GDP and the CLR.  Currently, however, there is a rather large divergence between GDP and the declining CLR.  This is due to the ongoing injections of liquidity from the Federal Reserve which continue to pull forward future consumption.  The Fed is very hopeful that the current “soft patch” in the economy, which produced a 1.8% growth rate in Q1 and likely a 1.2% growth rate in Q2, will somehow gain traction by year end.  The problem is that the CLR is currently predicting softer future growth rather than stronger.

    As discussed recently in “Bernanke: The Only Game In Town” it is very probable that current GDP levels are being overstated and future revisions will likely be to the negative.  This will create the “catch up” between what the CLR is telling us about the real level of economic strength versus what is being reported.

    It is a fine balancing act for the Federal Reserve.  Bernanke’s recent Humphrey-Hawkins testimony was filled with “hope,” but few guarantees, other than the Fed will keep interest rates “extraordinarily accommodative for the foreseeable future.”  The problem is that Congress is doing little with fiscal policy that is beneficial for promoting stronger economic growth and the next couple of months will see the debt ceiling debate ensue.  Those debates, and ultimately the results, when combined with the drag being created by the Affordable Care Act, are going to hurt Bernanke’s efforts more than help.

     

    About The Author

    Lance Roberts – Host of StreetTalk Live
    After having been in the investing world for more than 25 years from private banking and investment management to private and venture capital; Lance has pretty much “been there and done that” at one point or another. His common sense approach has appealed to audiences for over a decade and continues to grow each and every week.

    Lance is also the Chief Editor of the X-Report, a weekly subscriber based-newsletter that is distributed nationwide. The newsletter covers economic, political and market topics as they relate to the management portfolios. A daily financial blog, audio and video’s also keep members informed of the day’s events and how it impacts your money.

    Lance’s investment strategies and knowledge have been featured on Fox 26, CNBC, Fox Business News and Fox News. He has been quoted by a litany of publications from the Wall Street Journal, Reuters, The Washington Post all the way to TheStreet.com as well as on several of the nation’s biggest financial blogs such as the Pragmatic Capitalist, Zero Hedge and Seeking Alpha.

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