The Leading Economic Index rose 0.4 percent in April, led by strong gains from the interest rate spread and building permits, while both labor market components caused a slight drag.Building Permits and Interest Rate Spread Lead the Charge
April’s reading of the Leading Economic Index (LEI) resulted in the fourth consecutive month of gains, up 0.4 percent. While the first quarter proved to be rather ugly, things seem to be picking up in the economy and continued growth in the LEI is consistent with this view. Building permits bounced back after causing the largest drag in March to contribute a positive 0.24 percentage points to the overall index and was the second largest positive contributor after the interest rate spread. This comes as little surprise as last week’s release of building permits showed a jump of 8.0 percent month-over-month in April, and housing starts also surged 13.2 percent, month-over-month. These are welcome reports for residential construction, as housing market indicators had been somewhat disappointing in the first quarter. We are hopeful that these figures represent the housing recovery regaining its footing after an icy winter. The gains in April are more consistent with our view for improvement in residential construction throughout 2014.
The components for manufacturers’ new orders for consumer goods and consumer expectations also contributed to this month’s gain, as the consumer appears set to contribute nicely to growth, once again, in the second quarter. The component based on stock prices was flat. The lack of a positive or negative contribution from stock prices could also have been reasonably expected as markets have remained volatile, leaving monthly averages mostly flat over the past several months.
Labor Market Indicators Lag
Contrary to the positive flip in the building permits component, the average workweek went from one of the strongest contributors in March to one of the biggest detractors in April. Jobless claims were also a drag on this month’s LEI, as April’s average claims rose relative to March, but still remain low. Despite the two labor market components being net negative this month, it is certainly nothing to wave the red flag over, considering they only contributed a combined drag of 0.1 percentage points. Our outlook on the labor market remains positive as the economy gains momentum following a tough first quarter. The new orders component of the ISM manufacturing survey rose nearly 5 points in April, but did not provide the boost to the overall index we would have expected. Although this component imposed a slight drag this month, we would expect continued improvement in this category as orders should pick up following the particularly difficult winter. Overall, the LEI paints a positive picture for the economy going forward and should continue to do so as more indicators improve in the spring months.
Wells Fargo