What Is the Leading Economic Index?

The Leading Economic Index (LEI), sometimes called the Composite Index of Leading Indicators, is a composite economic indicator developed to signal changes in the business cycle before broader shifts occur in the overall economy. It is designed to forecast future economic activity by aggregating a group of forward-looking indicators. The LEI is widely used by economists, analysts, policymakers, and investors to assess the direction of economic trends, anticipate turning points, and support strategic planning.

Published monthly by The Conference Board in the United States, the LEI aims to provide an early indication of peaks and troughs in the business cycle. Unlike lagging or coincident indicators, which reflect the current or past state of the economy, the LEI looks ahead, helping decision-makers position themselves in advance of significant economic shifts.

Composition of the Index

The U.S. Leading Economic Index consists of ten individual components that are selected for their predictive qualities. These components are drawn from different areas of the economy—financial markets, manufacturing, employment, and consumer behavior—making the index broad-based and relatively resilient to volatility in any one sector.

As of the most recent composition, the ten components of the U.S. LEI include:

1. Average weekly hours in manufacturing
2. Average weekly initial claims for unemployment insurance (inverted)
3. Manufacturers' new orders for consumer goods and materials
4. ISM® New Orders Index
5. Manufacturers’ new orders for nondefense capital goods excluding aircraft
6. Building permits for new private housing units
7. Stock prices (S&P 500 Index)
8. Leading Credit Index™
9. Interest rate spread (10-year Treasury bonds minus federal funds rate)
10. Average consumer expectations for business conditions

Each component is normalized and adjusted to ensure consistency, and they are weighted according to their historical contributions to predicting economic cycles. The final index value is calculated as a weighted average of the changes in these components.

Purpose and Use

The main purpose of the LEI is to signal turning points in the economy. A sustained increase in the index typically suggests that economic expansion is likely in the near future. Conversely, a persistent decline often signals an impending slowdown or recession. However, one month’s reading alone is not sufficient to draw strong conclusions. Analysts look for trends over several months to identify a meaningful signal.

Businesses use the LEI to time investment decisions, such as capital expenditures and hiring. Investors may use it to inform asset allocation strategies or to anticipate shifts in corporate earnings. Government agencies and central banks use the LEI as part of a broader dashboard of indicators to shape fiscal and monetary policy.

Limitations

While the LEI is a valuable forecasting tool, it is not infallible. Its predictive ability relies heavily on the performance of its underlying components. If these components fail to reflect the underlying state of the economy or are distorted by temporary shocks, the index may produce misleading signals.

Another limitation is that the LEI may not fully account for structural changes in the economy or for global developments that have spillover effects. For instance, rapid technological changes or international disruptions may not be immediately captured in the domestic indicators. In addition, certain policy responses, such as aggressive monetary interventions, can delay or mute the impact of indicators traditionally associated with recessions or recoveries.

Global Variants

The concept of a leading economic index is not limited to the United States. Other countries have their own versions, often compiled by national statistics offices or private research institutions. For example, the OECD produces a Composite Leading Indicator (CLI) for its member countries, aiming to provide early signals of turning points in economic activity across the global economy.

These international indexes are tailored to reflect the economic structure of each country or region, though many include similar components such as stock market performance, interest rate spreads, and new orders in manufacturing. The presence of comparable indexes across countries allows analysts to track the synchronization or divergence of global business cycles.

Historical Context and Revisions

The concept of leading indicators was formalized in the mid-20th century through the work of economists such as Wesley Mitchell and Arthur Burns. The Conference Board began publishing the LEI in its current form in 1996, taking over from the U.S. Department of Commerce. Since then, the composition of the index has been revised periodically to improve its predictive power and reflect changes in the structure of the economy.

The index is also subject to monthly revisions as updated data becomes available. These revisions can sometimes alter the direction or magnitude of previous readings, which is why multi-month trends are more reliable than individual data points.

The Bottom Line

The Leading Economic Index (LEI) is a forward-looking tool that aggregates multiple economic indicators to anticipate changes in the business cycle. It helps signal potential expansions and recessions before they become evident in broad economic data. Although no index can predict economic outcomes with complete accuracy, the LEI is widely respected for its track record in highlighting future trends. Used in conjunction with coincident and lagging indicators, it provides valuable context for understanding where the economy may be headed.