Conflicting Signs: Leading Indicators and Philly Fed Survey Suggest Q3 Growth

Two reports half an hour into the trading session indicated that the economy is turning for the better. The Leading Indicators Index (LEI) moved up for its fourth straight month in July, and the regional manufacturing report from the Philadelphia Federal Reserve rose to its highest level since November 2007.

The LEI is a composite index that uses a broad gauge of economic data to track turning points in the economy. The 0.6% advance in July puts the six-month index at an annualized pace of +6.2%, marking a substantial improvement from the -5.4% annualized decline seen in the second half of 2008. 

“The interest rate spread, initial unemployment claims and the average workweek made large positive contributions to the index this month, more than offsetting the negative contributions from consumer expectations, real money supply, and building permits,” said the Conference Board, who compile the data. They said “widespread strength” has allowed for a sharp upturn in the past four months.

Markets were looking for a +0.7% advance this month, but overall the report came in as expected.

Meanwhile, following the NY Fed’s upside surprise in the Empire State manufacturing survey on Monday, the Philly Fed survey bounced into positive territory as it climbed from -7.5 in July to +4.2 this month. Markets were looking for a +2.0 reading.

“For the first time since November 2007, all of the survey's broad indicators were positive,” the report said. “Although employment continued to decline among the reporting firms, losses were less widespread this month.”

New Orders jumped six points to +4.2, Shipments climbed ten points to +0.6, and Employment losses were moderated from -25.3 to -12.9 • its highest reading in 11 months.

“The broader implication here is that the ISM manufacturing report now has the opportunity of breaching the psychologically-important 50-threshold,” said Ian Pollick from TD Securities, anticipating the nationwide report from the Institute for Supply Management. 

Pollick called the survey “a strong report through and through,” noting that that it was only in February when the report registered at -41.3.

Taken together, the LEI and Philly Fed index show stabilization in the economy, though earlier today we heard that jobless claims rose for the second straight week, confirming that stabilization in the economy comes at the high cost of slashing payrolls.

Looking forward, Mortgage News Daily Editor and Analyst Adam Quinones says “Although shrinking business inventories are likely to help Q3 GDP show growth and increase optimism in the marketplace, the bigger picture problem will persist. Ongoing weakness in the labor market coupled with declining household incomes and contracting consumer spending implies the recovery process will be slower than most main street investors anticipate.”

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