While the Federal Reserve saw enough improvement in the economy to raise the short-term interest rates in December, the Conference Board reports that the economy actually lost momentum at the end of the year.
The Conference Board’s Leading Economic Index (LEI) dropped by 0.2 percent in December down to 123.7 (2010=100) after increasing by 0.5 percent in both October and November. The Bureau of Economics and Analysis (BEA) reported at the end of December that real GDP grew at only half the pace in Q3 (2.0 percent) that it did in Q2 (3.9 percent), indicating that economic activity was slowing down.
“December’s decline in the LEI, while small, was led by the decline in housing permits, followed by weak new orders in manufacturing,” said Ataman Ozyildirim, Director of Business Cycles and Growth Research at The Conference Board. “Over the last six months, the housing permits component showed three negative components offsetting the other three month’s increases. In the last six months, housing permits haven’t supported the LEI as much as expected although, despite larger than usual volatility in recent months, the overall trend in the housing market has also been positive.
He continued, “In 2016, even though growth may be stuck in the slow lane, increasing employment and consumer confidence should support more young people finally moving out of parents’ basements into their own homes creating demand that pushes building activity up, however jagged the pace may be.”
The LEI contains 10 economic components, including stock prices, average weekly hours in manufacturing, interest rate spread and 10-year Treasury bonds less federal funds, and building permits/private new housing units.
“In 2016, even though growth may be stuck in the slow lane, increasing employment and consumer confidence should support more young people finally moving out of parents’ basements into their own homes creating demand that pushes building activity up, however jagged the pace may be.”
Ataman Ozyildirim, The Conference Board
In December, the Conference Board forecasted GDP growth of 2.4 percent in 2016 due to persisting economic headwinds that include oil-related cuts to investment, stronger dollar and weak external environment along with ongoing inventory correction despite the fact that consumption and housing are supportive of growth.
Despite December's slight decline, Ozyildirim said the index continues to suggest moderate growth in the near-term and that it is too early to interpret the decline as a substantial rise in the risk of recession.
“The short-term trends in the LEI, measured by looking at its six month growth rate, is still well in positive territory associated with economic expansions even though this growth rate has moderated since earlier in 2015,” he said. “Last June the LEI was growing at a 2.0 percent rate (not annualized) but now it is growing less than half that, at 0.7 percent. So it is too early to say that LEI is signaling a change in the direction of the economy, but the LEI is consistent with slow to moderate growth—not too far below the economy’s potential but not much above it either.”
In order for the economy to regain its momentum in 2016, Ozyildirim said, “Continued gains in job, increasing incomes, and consumer confidence remain the main factors supporting this expansion so far. Despite domestic and global volatility, especially jittery financial markets, we expect those trends to continue and deliver about trend growth for the U.S. economy, unless repeated bouts of financial volatility and other geo-political risks start to sap consumer, business, and investor confidence.”