The Conference Board Leading Economic Index® (LEI) for the U.S. decreased by 0.3 percent in April to 119.2 (2016 = 100), following a 0.1 percent increase in March. (But) The LEI is now up 0.9 percent over the six-month period from October 2021 to April 2022.
Not many economists cite the Conference Board’s Index of Leading Economic Indicators (LEI) that are good at predicting future economic activity. It’s much better than the projected earnings estimates Wall Street traders tend to follow who are pressing the panic button that a recession in imminent.
So why the current doom and gloom with corporations still making record profits and unemployment at record lows?
The LEI is a good predictor of recessions as the above graph shows, with gray bars indicating past recessions and the LEI’s immediate up trend at the end of each recession.
“The US LEI declined in April largely due to weak consumer expectations and a drop in residential building permits,” said Ataman Ozyildirim, Senior Director of Economic Research at The Conference Board…A range of downside risks—including inflation, rising interest rates, supply chain disruptions, and pandemic-related shutdowns, particularly in China—continue to weigh on the outlook. Nevertheless…The Conference Board still projects 2.3 percent year-over-year US GDP growth in 2022.”
U.S. corporations are making record profits as a percentage of GDP—in fact, the highest profits since World War Two, as the St Louis FRED historical graph from 1950 shows. During the COVID pandemic it dropped briefly to 8 percent of GDP, but quickly rose to its current 11.2 percent, the best on record.
And because corporations made record profits over the past year due to the pandemic, earnings growth will slow to historical levels this year, as the law of averages requires. So rather than focus on quarterly trends (i.e., short-term profits), serious investors and fund managers need to focus on the long term, when their investors approach retirement age.
U.S. economic growth must also come down from its 5.6 percent high last year when consumers and businesses burst out of the pandemic; essentially starting from a ground zero of economic shutdowns during March-April 2020.
The flood of new money from the $trillions in aid and record rescue packages have goosed that growth, causing the current inflationary surge. But such spending and inflation will also slow for the same reason.
Prices had stalled at ground zero back then, even fallen into negative territory. So, the law of averages rules once again—demand will slow from its artificially boosted high, while supplies will catch up from their artificially-induced scarcities.
Fed Chair Powell has been attempting to tell us that in his latest press conferences, so why won’t the financial markets believe him? Settling for moderate growth means more sustainable, longer term growth.
Harlan Green © 2022
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