Leading Economic Indicators Report is Blind

By The Greek - Economy and Markets

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The day's sole economic report, Leading Indicators, rose 0.3% in September. Bloomberg's consensus of economists had been looking for an increase of 0.2%, but doesn't an increase of any sort defy logic considering recession is widely expected to hit home in Q3? Are leading indicators blind? As always, the devil is in the details.

(Article interests: AMEX: DIA, AMEX: SPY, Nasdaq: QQQQ, NYSE: NYX, AMEX: DOG, AMEX: SDS, AMEX: QLD, AMEX: XLF, AMEX: IWM, AMEX: TWM, AMEX: IWD, AMEX: SDK)

Economists far and wide anticipate the economy already slipped into recession or will in coming quarters, so then how could Leading Economic Indicators point toward growth? Well, first of all, this positive result is the first in five months, and compares against declines of 0.7% (revised) and 0.9% (revised) in July and August, respectively. What's more, the index is still down 1.3% over the six months ended September.

Even so, you must be wondering what the heck happened in September? Nothing seemed good about September, so what gives then... We have to study the components of the index, and see what drove the gain to figure that out. The two most important drivers of growth here were increases in the real money supply and the spread between 10-year treasuries and the fed funds rate, both resulting from the credit crisis. The third driver of leading indicator improvement was, get this, the index of consumer expectations. Clearly, that's not going to hold up in October, if it doesn't sink to new lows.

A total of six factors drove improvement versus four on the downside. Besides the deceptive factors we mentioned thus far, the others had mostly negligible impact. All except for the impact of supplier deliveries, which measures vendor performance. However, perhaps it's still too early to see vendor delivery failure.

The factors that worked counter to growth were of the sort that tend to point truer toward trouble. Weekly jobless claims, average work-week, stock prices and building permits all offered a sour forecast.

So, in conclusion, despite the headline, this report does not offer a reason for enthusiasm. As always, the devil was in the details.

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