The Conference Board announced that its Leading Economic Index rose 0.4 percent in December, the third consecutive month of gains. Manufacturing played an important role in this month’s increases, with increased new orders and a longer average workweek. Improvements in the employment situation, equity markets and the interest rate spread also made positive contributions to this figure, with lower consumer confidence dragging it lower.
The index has changed, effective with this month’s release, by replacing a measure of the money supply (M2) with a newly-created Leading Credit Index. The switch was made so that the indicator would do a better job of predicting the impact of credit crunches on the business cycle, with this new measure an improved predictor of the recent downturn. In this month’s analysis, the index was lower, providing a slight drag to the composite figure.
The Coincident Economic Index, which measures the current environment, increased by 0.3 percent. All of the subcomponents of this index rose. This includes higher levels of industrial production, manufacturing and trade sales, nonfarm employment and personal income.
This positive report mirrors another national index on the economy from the Chicago Federal Reserve Bank. Its National Activity Index rose from -0.46 in November to +0.17 in December. This measure looks to see if the U.S. is expanding at its historical growth rate; therefore, positive numbers reflect above-average growth. This month’s data suggest a significant improvement, with manufacturing output the leading contributor. The production-related variables shifted from -0.28 to +0.24 for the month, led by stronger manufacturing production and capacity utilization.
Other positive contributors included higher employment and sales. Housing, on the other hand, remains a weak spot. Overall, 85 indicators provided a positive contribution, offset by 32 others.
The three-month moving average for the composite index improved from -0.19 to -0.08 in December. This suggests that, while the overall economy remains below its long-term trend, it is moving in the right direction. Moreover, the risk of recession is reduced, as the index has moved further away from the -0.70 threshold which suggests an increased likelihood of recession.
These two measures – one from the Conference Board and the other from the Chicago Fed – are good news as we enter 2012. The economy is improving, with manufacturers playing an important role in its recent rebound.
Chad Moutray is chief economist, National Association of Manufacturers.
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