The leading index fell in September for the third consecutive month. With September's decline, the growth rate of the leading index has slowed gradually to about a 0.0 to -1.0 annual rate, down from its most recent peak growth of about 4.5 to 5.5 percent (annual rate) reached in the first quarter of 2006. Business failures (inverted), new orders for machinery and construction, and stock prices made the largest negative contributions to the decline in the leading index in recent months. In addition, the weakness in the leading index has become somewhat more widespread in recent months.
The coincident index also fell in September as both the industrial production and the real retail, wholesale, and manufacturing sales components fell sharply this month. At the same time, real GDP growth slowed to a 2.1 percent annual rate in the first half of 2006, slightly down from the 2.6 percent rate in the second half of 2005. The weakness in the leading index in recent months suggests that the slow economic growth is likely to continue in the near term.
LEADING INDICATORS. Six of the ten components that make up the leading index increased in September. The positive contributors to the index — in order from the largest positive contributor to the smallest — include real money supply, interest rate spread, stock prices, the six month growth rate of labor productivity, real operating profits*, and dwelling units started. The negative contributors — in order from the largest negative contributor to the smallest — include the new orders for machinery and construction component*, the (inverted) business failures*, and the index of overtime worked. The Tankan business conditions survey remained unchanged in September.
With the decrease of 0.2 percent in September, the leading index now stands at 87.0 (1990=100). Based on revised data, this index decreased 0.5 percent in August and decreased 1.0 percent in July. During the six-month span through September, the index decreased 0.2 percent, and four of the ten components advanced (diffusion index, six-month span equals 40.0 percent).
COINCIDENT INDICATORS. Two of the four components that make up the coincident index decreased in September. The positive contributors to the index — in order from the larger positive contributor to the smaller — include number of employed persons and wage and salary income*. The real retail, wholesale, and manufacturing sales* component and industrial production declined in September.
With the decrease of 0.2 percent in September, the coincident index now stands at 106.9 (1990=100). Based on revised data, this index increased 0.3 percent in August and was unchanged in July. During the six-month span through September, the index increased 0.8 percent, and three of the four components advanced (diffusion index, six-month span equals 75.0 percent).
This release incorporates benchmark revisions into the composite indexes for Japan. The composition of the leading index for Japan has been revised. The details of these changes in composition can be found on page 3. (The benchmark revisions also bring the composite indexes up-to-date with data revisions in the components and update the standardization factors used in their calculation. This is a maintenance procedure typically done once a year, which usually does not change the cyclical properties of the indexes and has, as expected, very small effects.)
This release also incorporates two major methodological revisions to the composite index of leading economic indicators (LEI) for Japan: 1) a new method for calculating the contribution of the yield spread in the LEI and 2) a trend adjustment to the LEI. The new measure of the yield spread improves the performance of the LEI by better reflecting the way the yield spread anticipates cyclical economic turning points. The trend adjustment facilitates interpretation and use of the LEI.
These changes are the result of research at The Conference Board (TCB) and regular consultations with its Business Cycle Indicators Advisory Panel and other experts. The Conference Board continuously monitors the behavior and performance of the composite indexes and their components and makes changes from time to time. This revision is consistent with long-standing Conference Board policy to make changes to the indexes when research indicates substantial improvements are possible. Because of these revisions, the composite indexes and their monthly changes are no longer directly comparable with previous releases. Similar methodological changes were introduced into the US LEI last year and will be incorporated into the LEIs of other countries covered by The Conference Board global indicators program.
