Muddling Is The Best QE Is Doing

The Conference Board Leading Economic Indicator Index rose 0.6% in September which was a tad better than estimates.  However, the August report was revised sharply downward from a -0.1% decline to -0.4% so the actual increase in September was about in line with original estimates of a 0.2% increase.  The leading economic indicators have been stagnant since the first of the year and the current read is only 0.1% higher than it was in May.  The biggest contributors, not surprisingly, to the most recent advance were building permits and the yield spread.

However, what we are watching closely is the coincident to lagging indicator ratio as shown below.  While the ratio ticked up by 0.1% in the most recent reporting period it failed to recoup the 0.3% decline from the previous month.  What is important about this particular ratio is that it is, in effect, a book-to-bill ratio for the overall economy.

The 91 level has historically been indicative of a recessionary economy.  The current negative trend in this indicator is certainly concerning as it implies that economic momentum is on the decline.  As we discussed in yesterday’s report on the Philadelphia Fed Manufacturing report which showed heavy deterioration in the Future Activity measures:  “As shown there have only been two times in the history of the index when the 6-month moving average of the survey was below zero and the economy was not in, or about to be in, a recession.  The 2011 recovery, as we have discussed previously, was driven by artificial intervention by the Fed and the ECB, a manufacturing restart from the Japanese earthquake and tsunami, a drop in oil and energy prices and an unseasonably warm winter.   Outside of the Fed’s current bond buying program the other supports that buoyed the economy in 2011 are not present today.”

Can the economy continue the “muddle through?”  Certainly, while historically it has never been the case, there is always a possibility that with enough central planning and interventions that we could continue this economic malaise for far longer than we can imagine.   However, the simple reality is that without the “artificial life support” provided by Dr. Bernanke the economy would very likely already be in a coma.

http://pragcap.com/chart-of-the-day-lei-coincident-to-lagging-indicator