Leading Indicators & the Growth Debate

The Conference Board’s Index of Leading Economic Indicators rose again in August, extending a five month streak of gains. Clearly, the U.S. economy has troughed and is poised to expand, and it still looks likely that the expansion will surprise to the upside. This supports the position we staked out in early June, which marked a turn from our pessimistic outlook of 2008:

[T]hese signs [a recruiter survey and payroll data] confirm what credit markets and unemployment claims have been indicating during the second quarter, and we continue to see a very high probability of the recession ending this year. In fact, there’s even a reasonable probability of the recession ending this quarter (ie, by the end of this month). And while it’s likely to be some time before we return to the level of economic activity that prevailed before this downturn, the rate of growth from current levels looks like it could surprise to the upside.

Some of the pundits quoted in an AP story about the LEI sound almost giddy about economic prospects, others still very skeptical. We agree with the skeptics a least in part, as they agree with the caution we expressed in June:

The caveat, as before, is how durable the recovery will be, and on that count, we still see plenty of risks to the U.S. economy in late 2010 and beyond. Such a cycle would reminiscent of both the late 1970s and the late 1930s.

But as noted above, we now place a very high probability on the ensuing expansion surprising to the upside, and perhaps the evidence we base this on is causing the giddiness among some commentators. If so, we would urge some sobriety — as we have been pointing out in recent months, high growth magnitudes are not desirable if they are a symptom of economic volatility.

URLs:

http://www.conference-board.org/economics/bci/pressRelease_output.cfm?cid=1

http://symmetrycapital.net/index.php/blog/2009/06/recruiter-confidence-and-economic-outlook/

http://www.symmetrycapital.net/idlespeculation/20080925_policy_mix.pdf

http://news.yahoo.com/s/ap/20090921/ap_on_bi_ge/us_economy