Leading Economic Indicators
The index of leading economic indicators (LEI) is a weighted average of eleven economic variables that "lead" the business cycle. It is constructed for forecasting future aggregate economic activity.
The eleven variables that make up the LEI measure workers' hours, initial unemployment claims, new factory orders, vendor performance, contracts and orders for plant and equipment, new housing permits, changes in unfilled orders, prices of raw materials, stock
prices, money supply and consumer expectations.
Each of the variables that comprise the index has a tendency to predict (or lead) economic activity. For example, new orders for manufactured goods, new orders for plant and equipment, and new building permits are all direct measures of the amount of future
production being planned for the economy.
Analysts monitor the LEI in an effort to predict future economic growth. When the LEI report is up, mortgage market participants expect credit demand to increase and inflationary pressures to build. Thus, when the LEI report is rising, interest rates tend to
rise as well.
The LEI report is a valuable forecasting device that correctly predicts most economic turning points. The percentage change in the LEI is reported monthly and is an indication of the activity that will occur within the next three to six months. The LEI tends
to turn down before peaks in the business cycle. Continuous declines are generally accepted as evidence that a recession continues.
Nine of the eleven components that make up this index are known before the release of the report, so the index is easy for economists to predict. Thus, although this is important predictive data for market participants, market volatility does not usually surround
the release of this data. However, considering there are few data releases this week mortgage interest rates may have a stronger than normal reaction to any disparity between the consensus estimate and the actual result of the release.