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Increase in leading economic indicators positive for U.S. economic growth

The index of leading economic indicators (LEI) in the United States rose 0.4% in May, as indicated in the chart below, slightly below economists` expectations of a 0.5% increase. The leading economic index from the Conference Board – a private research group – forecasts economic activity over the next three to six months.

Conference Board U.S Leading and Coincident Economic Indices since July 2008

With the exception of April 2010, where the index did not change, the LEI has risen in 13 out of the last 14 months. The rising index has been driven by the increasing amount of money in the economy, the rebound in manufacturing and slow improvements in the job market.

At MD, we use the U.S. Leading Economic Indicator Index as a measure to help determine the general state of the economic recovery and, specifically, the potential for a rebound in U.S. consumer activity (one of the four factors MD follows in the U.S. economy).

Rate spread boosts leading indicators

The interest rate expectation – represented by the difference between 10-year Treasury note yields and the overnight fed funds rate – saw the most significant increase from April, rising by 34 basis points. In total, five of the ten indicators contributed to the increase during the month. A decline in stock prices and building permits detracted from index performance. The gap between 10-year Treasury note yields and the overnight fed funds rate will likely narrow as the note’s yield drops over efforts to curb European government debt, slowing global growth.

What does this mean overall?

The LEI increase points to continued – although slower – economic growth in the U.S. Although the European debt crisis continues, it has not hindered the U.S. economy from advancing at this point, though economists are not ruling out a slowdown in European growth next year, which could weaken U.S. economic improvement.

We continue to advise you to remain focused on your long-term financial plan, and ensure that your current mix of investments matches the strategic asset allocation appropriate for your financial purposes.