Friday, June 4, 2010

Leading Indicator in Trouble?


Of all the indicators of Canada’s economic rebound, perhaps none is more convincing than StatCan’s Composite Leading Indicator (CLI). The Index has now risen for 11 consecutive months, at an impressive average monthly pace of 1%. In the latest survey, 8 of the 10 components increased, clearly a solid result. This indicator is on a roll, but is there a danger that it might actually roll over?

Canada’s CLI puts together indicators that have consistently predicted near-term movements in the economy. The individual indicators cut a broad swath across the economy, from housing markets to service sector employment, the stock market, money supply, multiple indicators in the manufacturing and retailing industries, and the US leading indicator as an index of foreign demand. These are generally the same indicators that lead economic activity in other major developed economies.

In the past three major cycles, the indicator has changed direction just ahead of the economic cycle, in both the downturn and recovery phases. This time around, the CLI flattened in mid-2007, then plunged 7% from mid-2008 to mid-2009, comparable with previous pre-recession tumbles. Current growth in the indicator also squares well with previous recovery-period growth spurts in the CLI. Thus far, the growth pattern would suggest a typical recovery. But that may just be about to change.

Read more or watch the video version here.