Thursday, November 19, 2009

Leading Economic Indicators Index increases again

I am a big fan of the Leading Economic Indicators, however I like much less the Index of Leading Indicators. The reason is because of the way it is constructed: the weights of each component are designed to smooth out the index (precisely, each one of the weights is calculated as the inverse of the component's volatility). As such, the weights don't reflect the predictive power of the indicators, nor their lead length relationship with the economy.

Secondly, the weights are recalculated each year and the components themselves have changed about once a decade.This invalidates historical comparisons.

Still, I prefer to see a rising Index rather than a falling one (click to enlarge):


  1. What about the model you did regarding leading ecomonic indicators? What does your model predict for the US GDP in 2010? Kevin from Redmayne Bentley Stockbrokers - Exeter, UK.

  2. I'm not an economist, but it seems to me that LEI and GDP have very good correlation until ~1986 but less so after that. Any thoughts on that?
    Darwin from Berkeley, California.

  3. Darwin, I am not an economist either, and I think you are right... kind of. The correlation with GDP is about 0.85 before 1986, and drops to 0.70 afterwards.

    However, as I was arguing in this post, it is not really appropriate to compare today's LEI with its older versions, which are quite different (see the Conference Board's website for more on that).