Although the news is really from last week, Caroline Baum helps us catch up today:
At a press conference last week to discuss changes to the LEI, Gail Fosler, chief economist of the Conference Board, said the industrial economy is "slowing down; actually it's slowing down quite quickly.''
Perhaps anticipating protestations that the U.S. is no longer an industrial economy, Fosler noted that "the direction of the economy and direction of the industrial economy move hand in hand.''
Here's the picture of that, in case you are doubtful:
The article continues:
In a subsequent telephone interview, Fosler said she looks at the LEI's "rate of change, rather than the level, to tell you whether the economy is accelerating or decelerating. It's decelerating.''
The growth rate of the LEI slowed from a peak of 10.3 percent (six-month annualized rate) in October 2003 to 1.2 percent in June of this year.
Extrapolating from the current growth rate, "we expect to see the economy slow to about trend or below trend in the next three to six months,'' said Ataman Ozyildirim, an economist with the business cycle indicators group at the Conference Board.
It does turn out that the Conference Board came to the conclusion that the term structure relationship of old needed to be rethought:
The Conference Board made two changes to its leading index last week. The first was the introduction of a "trend adjustment'' to the LEI, which will make the level of the LEI grow at the same rate as the coincident index even if the components change, according to Ozyildirim.
The second change was to the way the interest-rate spread -- specifically the difference between the yield on the 10-year Treasury note and the overnight federal funds rate -- contributes to the index.
Previously, a narrower spread compared with the prior month contributed negatively to the index. With the current revision, the Conference Board will use the cumulative sum of the yield spread to determine the component's contribution.
As a practical matter, the spread will subtract from the index only when it inverts (when the funds rate is higher than the 10-year note yield), not when it is narrowing.
In the big scheme of things, the LEI still says not to worry...
The slowdown in the LEI's growth rate is not signaling a slump. Historically, it takes a six-month annualized decline of 4.5 percent or more and a six-month diffusion index below 50, both for an extended period, to send a recession signal, Ozyildirim said.
The six-month growth rate of the LEI is still positive, and the six-month diffusion index, which measures the number of components that are rising, stood at 55 in June. (It's been at 50 or below in six of the last 12 months.)
... but the occasion to take a shot in the direction of the Fed is still too good to pass up:
So what would she say about Greenspan's assessment that policy is still accommodative and more rate increases are needed?
"I would say to Mr. Greenspan that there are more downside risks evident in the dynamics of the LEI that are not described in the Fed's current position,'' Fosler said.