What is the Leading Economic Index?

The Conference Board Leading Economic Index (LEI) is a composite indicator designed to predict turning points in the US business cycle. It combines 10 component indicators that individually tend to move ahead of changes in overall economic activity: average weekly hours in manufacturing, initial unemployment claims, manufacturers' new orders for consumer goods, ISM new orders index, manufacturers' new orders for nondefense capital goods, building permits, S&P 500 stock prices, the Leading Credit Index, the interest rate spread (10-year Treasury minus fed funds), and consumer expectations.

The LEI has an impressive track record. Sustained declines in the index (typically six or more consecutive monthly declines with a cumulative drop exceeding a certain threshold) have preceded every US recession since the 1960s. The average lead time between the LEI's peak and the onset of recession has been approximately 8-12 months, providing a meaningful early warning window.

However, the LEI has also produced false positives, signaling recession risks that did not materialize. The 2022-2023 period was a notable example: the LEI declined for 23 consecutive months, the longest streak on record, yet no recession occurred. This extended false signal raised questions about whether structural changes in the economy (the dominance of services over manufacturing, the evolution of credit markets, and the unusual post-COVID recovery dynamics) have reduced the LEI's predictive power.

For analysts, the LEI remains a useful component of the macro toolkit despite its limitations. The direction and magnitude of LEI changes are more informative than the level itself. The diffusion index, which measures how many of the 10 components are contributing positively, provides additional context: a declining LEI with only 2-3 components deteriorating is less concerning than one where 7-8 components are falling simultaneously. The Conference Board publishes the LEI monthly, approximately three weeks after the reference month, and it is freely available on their website.