Key Points

  • Surging leading economic indicators, coupled with fiscal policy, suggests a higher and longer trajectory for economic growth.

  • But accompanying higher inflation and tighter financial conditions point to an era of higher market volatility.

  • Volatility spikes are to be expected, but don’t historically signal impending doom for either stocks or the economy.

Every month in the immediate aftermath of the release of The Conference Board Leading Economic Index (LEI) I put together a small deck together for Schwab’s Operating Committee highlighting the overall data and some of the key takeaways. The latest report—out last week—was notable in its strength; and in stark contrast to the worries expressed by some clients lately about the risk of a recession in the near term.

LEI in record territory

The chart below has multiple components, which I’ll explain, but its key element is the overall LEI itself, shown in the line. The LEI rose 1.0% month-over-month in January to a new record high. Over the past three months it’s up nearly 10% at an annual rate. Historically, that’s been consistent with 4% real gross domestic product (GDP) growth.

LEI in record territory

Source: FactSet, The Conference Board, as of January 31, 2018.

On the chart above you will also see horizontal dotted and solid lines. The former represent “round trips” in the LEI—from the pre-recession cycle high through the trough and back to the prior high. The solid lines represent how long a span there was between the round trip being complete and the subsequent recession. As you can see, for the past three cycles (with the early-1980s double-dip recession considered as one) the span was between four and eight years. We are currently less than a year since the LEI took out its pre-recession high (it took the LEI more than 11 years to make a new high). That suggests we still have a decent runway ahead before recession risk begins to accelerate.