The composite index of leading economic indicators, reported by the Conference Board fell 0.7% in July after being unchanged in June (revised from -0.1%). Forecasts had anticipated only a 0.2% decline.

Last month the drop in building permits, higher claims for unemployment insurance and lower stock prices made the largest negative contributions to the leaders' decline. These were partially offset by a steepening of the yield curve (10-year Treasury yield vs. fed funds rate) and improvement in the University of Michigan index of consumer expectations.

The breadth of one-month increase amongst the leaders' 10 components eroded slightly to 40% from 45% in June. Over a six-month period the breadth of gain amongst the leaders' components fell back to 30% after rising to a revised 40% the month before.

The leading index is based on actual reports for eight economic data series. The Conference Board estimates two series, orders for consumer goods and orders for capital goods.

The coincident indicators rose 0.1% after a marginal downward revision of June's index to unchanged from +0.1%. Three of its components were positive in July but over the last six months all of them have declined. The index is off 0.5% from its peak last October. As Tom Moeller pointed out here last month, this is far more modest than the declines generally associated with recessions, as illustrated in the second graph here. Over the last ten years there has been an 86% correlation between the y/y changes in the coincident indicators and real GDP.

The lagging index 0.4% in July; the previously reported 0.3% decrease in June was revised to unchanged. The ratio of coincident to lagging indicators (a measure of economic excess) edged down from 95.5 during April, May and June to 95.3 in July. This indicator, which tends to lead the leading indicator index, fell steeply across the second half of 2007 and has since stabilized. While this looks like a hint that the precursors to an economic pick-up are coming in view, a major caveat would be the significant revisions, even in direction, that characterize the lagging index. So making firm, but hasty conclusions can be problematic.

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