June Index of Leading Indicators

The June Index of Leading Economic Indicators was up 0.4% compared to the consensus estimate of up 0.2%. What drove the increase was not reassuring, namely the steep yield curve and the M2 spike at the end of June. However, the magnitude of the boost from M2 is troubling to me. An increase of $76.9 billion for the week ended June 27th, and an increase of $88.6 billion for the week ended July 4th. According to the Money Market Economics group at Jefferies, these are the third and second biggest increases on record. The biggest increase was the $176.3 billion mainlined into the system on the collapse of Lehman Brothers in September 2008. We are well into one of the weakest recoveries on record now, so traditionally monetary stimuli would have been switched off long ago.

Some commentators noted that some of the fundamental indicators were affected by weather and other issues. This is clutching at straws. Absent the push from both M2 and yield curve slope, the index would have declined.

It is very hard to see what drives economic growth of 3-3.5% in the back half of 2011. Whatever growth does occur would not seem to be strong enough to move the employment numbers. A real danger of stagnation at low levels of growth exists. It also appears that inflation pressures from the real side of the economy are minimal at the present time.

The market is up today, though, as it searches for particles of light with a Greek "resolution," whatever that means.