Leading Economic Indicators

The Leading Economic Indicators (LEI) is a weighted composite of ten to thirteen economic variables selected because they historically turn downward before a recession and upward before a recovery. Published monthly by the Conference Board, the LEI includes measures of stock prices, jobless claims, building permits, and credit conditions. It is not a perfect forecaster but is the most widely watched single signal of near-term economic momentum.

The philosophy: Look ahead, not behind

Economic data is almost always backward-looking. The unemployment rate, GDP growth, and inflation are released weeks or even months after the period they measure. By the time the Bureau of Labor Statistics reports that unemployment rose to 5%, the economic damage has already begun. For businesses making hiring and investment decisions, or for the Federal Reserve adjusting policy, waiting for final confirmation of a slowdown is dangerous.

Leading indicators solve this problem by identifying variables that shift direction before the economy does. When jobless claims spike, it signals that employers are losing confidence and laying off workers—the unemployment rate will follow weeks or months later. When building permits fall, it foreshadows weakness in construction and related industries. When stock prices collapse, it typically reflects investors’ expectations of future earnings weakness. These forward-looking signals allow policy makers and businesses to react early.

The ten components of the LEI

The Conference Board’s LEI has evolved over the decades but typically includes:

1. Average weekly initial claims for unemployment insurance — A spike in claims signals coming job losses.
2. Average weekly hours in manufacturing — Businesses cut hours before laying off workers.
3. New orders for durable goods — Reflects business confidence in future demand.
4. Manufacturers’ new orders, nondefense capital goods — Capital spending plans are forward-looking.
5. Building permits — Construction activity often leads broader economic strength.
6. Standard & Poor’s 500 Index — Equity prices reflect earnings expectations.
7. Leading Credit Index — Measures credit conditions, which affect borrowing and spending.
8. Interest rate spread — The yield curve (long-term minus short-term rates) is a famous recession signal.
9. Consumer sentiment index — Household confidence often leads actual spending.
10. Real money supply — Adjusted for inflation, it reflects monetary policy stance and availability of credit.

Other variables are rotated in and out based on predictive power. The exact weighting changes periodically as the Conference Board updates the methodology.

How to read the headline number

The LEI is expressed as an index with a base of 100 in a reference year. The monthly change and the three-month rate of change are the key metrics. A rise in LEI signals momentum; a decline signals caution. Most famously, three consecutive monthly declines in the LEI has been a reliable recession warning, though false signals do occur.

The index can also be decomposed into its components to understand where strength or weakness is concentrated. A recession signal driven entirely by financial conditions (widening credit spreads, stock declines) looks different from one driven by a collapse in new orders. Analysts pay attention to the breadth of weakness across the ten components.

The track record

The LEI has predicted the last eight U.S. recessions, typically with a lead of three to six months. Most prominently, it fell sharply in 2007–2008, giving warning of the financial crisis. It also warned of the 2001 and 1990–1991 recessions, though with more modest declines. The 2020 COVID recession was unique—LEI collapsed vertically, reflecting the unprecedented policy shock, and recovered just as quickly.

However, the LEI has also generated false signals. In 2015–2016, it weakened amid a dollar surge and oil price collapse, raising recession fears, but the economy expanded. Similarly, brief dips in the LEI during the mid-2010s resolved without recession. This is why the Conference Board emphasizes the trend and breadth of the index rather than any single month’s number. A shallow one-month decline is less alarming than a sustained three-month downtrend.

Limitations and context

The LEI is a useful tool but not infallible. It is calibrated to historical relationships between forward indicators and recessions; if the structure of the economy changes (which it does), the LEI’s predictive power may diminish. For instance, the shift from manufacturing to services has altered the relationship between initial claims and employment growth, and the dominance of tech stocks in recent decades has increased the weight of equity prices in the index.

The LEI also suffers from false negatives: it sometimes remains strong even as recession looms. The 1987 stock market crash saw equities plummet with no following recession, creating a brief LEI warning that proved unnecessary. And the index can lag when the economy rebounds suddenly (as after the 2020 COVID shock), briefly suggesting weakness when the actual turning point is already past.

Policy makers do not mechanically respond to the LEI; they use it as one input among many. The Federal Reserve, for instance, will also monitor labor market data directly, inflation trends, financial conditions, and forward guidance from businesses. A single weak LEI reading, especially if it is driven by one or two components, may not trigger major policy shifts.

The global equivalent

Other countries and regional blocs publish their own leading indicators. The OECD publishes a LEI for several major economies, and the European Commission publishes one for the European Union. These follow similar logic—identifying variables that lead the national or regional business cycle—but the specific components differ based on local economic structure and data availability.

See also