Looking Under the Hood: What Does LEI Say About U.S. Economy?

When you hear a rumbling noise coming from your engine, you may pull your car over to the side of the road and take a look under the hood. In that same, way, economists and investors monitor many different reports, in order to get a handle on the health of the U.S. economy.

One of those reports is the Conference Board’s Leading Economic Index® (LEI). And look out! That report is making a loud rumbling noise from under the economy’s hood right now.

The latest LEI report revealed that the index dropped for the 21st consecutive month – signaling underlying weakness in the U.S. economy. The length of that negative streak in the LEI report has only been seen before at the start of the 1973 and the 2007 recessions.

Now, this doesn’t mean that history will repeat and it doesn’t guarantee a recession is around the corner.

But its objective evidence that the U.S. economy is slowing and weakening.

Here’s how the Conference Board describes this indicator: “The LEI is a predictive variable that anticipates (or “leads”) turning points in the business cycle by around 7 months.”

Wondering what the LEI measures each month? There’s a lot of parts in this engine! The ten components of The Conference Board Leading Economic Index® for the U.S. include: Average weekly hours in manufacturing; Average weekly initial claims for unemployment insurance; Manufacturers’ new orders for consumer goods and materials; ISM® Index of New Orders; Manufacturers’ new orders for nondefense capital goods excluding aircraft orders; Building permits for new private housing units; S&P 500® Index of Stock Prices; Leading Credit Index™; Interest rate spread (10-year Treasury bonds less federal funds rate); Average consumer expectations for business conditions.

The bottom line is that a time-honored economic indicator is flashing its “Check Engine” light on the economy’s dashboard.

The Federal Reserve is watching the data closely and is prepared to cut interest rates to help support the economy. The Fed already started talking about its plans to cut interest rates at its December meeting.

The Fed’s latest economic projections, known as the “dot plot,” signaled a drop in the Fed’s benchmark interest rate to 4.6% by the end of 2024 (that rate stands at 5.25%-5.50%. now). Some on Wall Street expect even bigger rate cuts ahead.

What does this mean for gold? The lower interest rate forecast is positive for gold and opens the door to a new rising price cycle for precious metals ahead. From J.P. Morgan to UBS to the Bank of America, the big firms all expect new record highs ahead for gold on the back of Fed interest rate cuts this year. With Wall Street forecasts ranging from $2,300 to as high as $2,550 an ounce, the future is bright for gold. While you never want engine trouble, investors who buy gold can help hedge against a “financial” breakdown on the side of the road. Have you considered if you own enough gold for what may lie ahead?

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