Mis-leading index? LEI breaks through pandemic-era low

Wells Fargo Research Team Wells Fargo

Summary

The outlook for a soft landing is still in play, and the Leading Economic Index continues to signal otherwise. The LEI declined 0.6% in July, bringing the streak to 29 consecutive months without a gain. At 100.4, the index has now fallen below the prior cycle's low reached in April 2020.

Long way down

The Leading Economic Index (LEI) declined 0.6% in July, bringing the streak to 29 consecutive months that the index has gone without an increase. The decline brings the index level to 100.4, declining below the prior cycle low previously reached in April 2020 (chart). The index level is now at its lowest point since 2016.

The Coincident Index came in flat on the month at 112.5. The index, a gauge of how the economy is currently performing, has been consistently increasing on trend since it began recovering from the 2020 recession. The recent positive trend for the Coincident Index in tandem with the persistently pessimistic trend in the LEI has led the Coincident-to-Leading Index ratio to increase exponentially. Ratio values greater than one signal that the outlook for the economy is comparatively worse than current economic performance, and vice versa. The ratio sits at 1.12 in July, signaling that the outlook for the economy is significantly more negative than the present situation (chart). This is the highest the ratio has been since 2009 in the trough of the Great Financial Crisis. The ratio usually peaks at the end of a cycle prior to a rebound in economic growth, a signal that the economy could be poised for decent growth in the quarters ahead.

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Wells Fargo Research Team

Wells Fargo

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