Index of Leading Economic Indicators is a composite of economic indicators whose value precedes the movement of economic activity. It tells us what will happen in the future, whether it will contract or expand.
The index simplifies conclusions about the direction of the economy in the future. Economists and policymakers often have difficulty in drawing conclusions from each of the leading economic indicators. Therefore, using statistical methods, practitioners then construct a single index (composite) that represents information from each indicator.
Index names and components could vary between countries and institutions. It depends on the type of data available and the method used.
The following are a few examples:
- Index of Leading Economic Indicators (LEI) by the Conference Board
- State Leading Indexes by the Federal Reserve Bank of Philadelphia
- Composite Leading Indicators (CLI) by the Organization for Economic Cooperation and Development (OECD)
Importances of the index of leading economic indicators
The index is critical in economic decision making. It becomes a valuable input for policymakers to formulate appropriate economic policies. The central bank monitors it to determine whether it is necessary to raise or lower interest rates.
Businesses track it down to see whether economic growth will remain robust. Strong economic growth supports corporate profits and encourages them to invest in capital goods.
In the stock market, healthy future economic growth means solid corporate profits. That keeps the prices of cyclical companies’ stocks attractive.
Conversely, the bond market does not like rapid growth because it raises inflationary pressures. High inflationary pressures depress bond prices because the central bank is likely to raise interest rates.