Global lei index

What Is the Global Leading Economic Index?

The Global Leading Economic Index (Global LEI) is a composite index designed to forecast future global economic activity, typically anticipating turning points in the business cycle several months in advance. Published by The Conference Board, a non-governmental organization, the Global LEI is a key tool within the field of macroeconomics, offering insights into potential shifts between periods of economic expansion and recession. It aggregates various individual economic indicators from multiple countries and regions, aiming to provide a comprehensive outlook on the world economy's trajectory.

History and Origin

The concept of leading economic indicators has roots in early 20th-century economic analysis, but the modern iteration of such indices gained prominence with the work of the National Bureau of Economic Research (NBER) in the mid-20th century. For decades, the U.S. government's Bureau of Economic Analysis (BEA) was responsible for producing the composite leading indicators. However, in 1995, the Department of Commerce decided to transition this responsibility to a private organization to redirect resources toward other statistical programs. After a competitive bidding process, The Conference Board was selected to become the custodian of the official composite leading, coincident, and lagging indexes, with the first independent release under their purview occurring in January 1996.²³ Since then, The Conference Board has expanded its scope to include global indices, such as the Global Leading Economic Index, providing a harmonized view of economic trends across major world economies.

Key Takeaways

• The Global Leading Economic Index (Global LEI) is a composite measure designed to predict future global economic conditions.
• It is published by The Conference Board and aggregates various national leading indicators.
• A sustained decline in the Global LEI often signals a potential slowdown or recession, while an increase suggests future economic growth.
• The index aims to provide early warnings of turning points in the international business cycle.

Components and Construction

The Global Leading Economic Index is a composite index, meaning it is constructed from a basket of individual economic data series that tend to change before the overall economy. While the exact components can vary slightly by region, The Conference Board's methodology for its national leading indices, which feed into the global one, typically includes about ten key variables. These variables are selected based on their historical tendency to lead turns in the business cycle. For the U.S. LEI, which influences the global index, common components include:

• Average weekly hours in manufacturing
• Average weekly initial claims for unemployment claims
• Manufacturers' new orders for consumer goods and materials
• ISM® Index of New Orders
• Manufacturers' new orders for nondefense capital goods excluding aircraft orders
• Building permits for new private housing units
• S&P 500® Index of stock market prices
• Leading Credit Index™
• Interest rates spread (10-year Treasury bonds less federal funds rate)
• Average consumer confidence expectations for business conditions

Th²²ese components are statistically weighted and combined to form a single index, which is then smoothed to reduce volatility and provide a clearer signal. The index is typically normalized to a base year, such as 2016=100.

##²¹ Interpreting the Global LEI

Interpreting the Global Leading Economic Index involves observing its direction, magnitude of change, and consistency over time. A consistent decline in the Global LEI over several months often indicates a forthcoming slowdown in global economic activity or a potential global recession. Conversely, a sustained increase suggests a period of expansion. For instance, a drop of 4% or more in the U.S. LEI, which contributes to the Global LEI, has historically been a strong signal of an impending U.S. recession. How²⁰ever, it is crucial to consider the "3 Ds" when interpreting the LEI: Duration, Depth, and Diffusion. Duration refers to how long a decline or rise in the index has lasted. Depth refers to the magnitude of the change. Diffusion measures the breadth of the change, indicating how many of the underlying components are contributing to the overall movement. A broad-based decline across many components is a stronger signal than a decline driven by only one or two volatile indicators.

##¹⁹ Hypothetical Example

Consider a scenario where the Global Leading Economic Index has shown a persistent decline over the past six months, moving from 110 to 105. This consistent downtrend, coupled with the observation that eight out of its ten constituent indicators are also falling, suggests a widespread weakening of global economic momentum. For instance, if data shows a significant drop in international manufacturing orders and declining global consumer confidence, these factors would contribute to the Global LEI's decline. Such a trend could prompt multinational corporations to scale back investment plans and adjust their outlook for future sales, anticipating a broader economic contraction.

Practical Applications

The Global Leading Economic Index serves as a vital tool for various stakeholders in the financial world. Policymakers, central banks, and international organizations utilize it to inform their decisions regarding monetary policy and fiscal policy. For example, a sustained decline in the Global LEI might prompt central banks worldwide to consider lowering interest rates or implementing quantitative easing measures to stimulate economic growth. Investors use the Global LEI to gauge market sentiment and anticipate shifts in asset prices, making informed decisions about portfolio allocation. Businesses rely on it for strategic planning, adjusting production levels, inventory management, and hiring forecasts based on the anticipated global economic climate. The yield curve, a component of the LEI, is also closely watched by economists and central bankers as an indicator of future economic conditions. For¹⁸ instance, an inverted yield curve, where short-term rates exceed long-term rates, has historically preceded recessions. Thi¹⁶, ¹⁷s relationship highlights how individual components of leading indicators contribute to the broader picture for practitioners. More broadly, the Federal Reserve system routinely conducts research on various economic indicators, including those that compose the LEI, to understand and forecast economic conditions. One¹⁵ such example is research exploring the predictive power of the yield curve on recessions.

##¹³, ¹⁴ Limitations and Criticisms

Despite its utility, the Global Leading Economic Index, like all predictive models, has limitations. Critics note that while leading indicators describe future economic trends, they are not always perfect at forecasting precise market movements or specific turning points. For¹² instance, the LEI incorporates market sentiment and stock prices, which means it can be influenced by current market environments rather than solely being predictive of future shifts.

On¹¹e criticism centers on the composition of the index, particularly the use of diffusion measures alongside dollar-based series. Diffusion measures indicate the breadth of change but not the magnitude, which some argue can obscure the true economic impact compared to dollar-based series. For¹⁰ example, a diffusion index for new orders might show many firms reporting increases, but if the magnitude of those increases is small compared to declines elsewhere, the overall economic picture could be distorted. Fur⁹thermore, while the LEI has a strong track record, particularly the U.S. LEI which has correctly predicted every U.S. recession since 1959 when certain thresholds are met, it ⁸is based on past patterns. Structural changes in the global economy, such as the shift from manufacturing to services, could alter the predictive power of certain components. The⁷refore, analysts must exercise caution and consider a wide array of factors beyond just the Global LEI when making assessments of future gross domestic product and overall economic health.

Global Leading Economic Index vs. Coincident Economic Index

The Global Leading Economic Index (Global LEI) and the Coincident Economic Index (CEI) both measure economic activity but differ in their timing relative to the business cycle. The Global LEI is designed to anticipate economic turning points, providing a forward-looking view of where the economy might be headed. Its components, such as new orders and building permits, typically change before the broader economy shifts.

In contrast, the Coincident Economic Index reflects the current state of the economy. Its components, which include measures like payroll employment, personal income less transfer payments, manufacturing and trade sales, and industrial production, move in tandem with overall economic activity. The⁵, ⁶ CEI helps economists and policymakers confirm economic trends that are already underway, whereas the Global LEI attempts to signal those trends before they fully materialize. While the LEI leads economic turning points, the CEI coincides with them, offering a real-time snapshot of the economy's present health.

FAQs

What organization publishes the Global Leading Economic Index?

The Global Leading Economic Index is published by The Conference Board, a non-governmental research organization. It ⁴provides insights into economic trends and serves as a tool for economic forecasting.

How often is the Global LEI updated?

The Conference Board typically releases updates for its various Leading Economic Indices, including national and regional ones that feed into the global perspective, on a monthly basis. Thi³s regular publication allows for timely monitoring of changes in economic activity.

Can the Global LEI predict stock market movements precisely?

While the Global Leading Economic Index incorporates stock market prices as one of its components, it is not designed to predict precise market movements with certainty. Instead, it aims to forecast broader economic trends and turning points in the business cycle. Sto¹, ²ck market performance is just one of many factors contributing to the index.