The US Conference Board index of leading indicators fell by a smaller-than-expected 0.2% in June and is still up by 2.6% over the last six months, suggesting a solid near-term economic outlook.

The bulk of the recent gain, however, is due to the component measuring the slope of the yield curve – the gap between the 10-year Treasury yield and the fed funds rate. This component has been contributing 0.3-0.4 percentage points to the monthly change in the index.

A positive yield curve slope is less likely to signal economic strength when short-term interest rates are unusually low. The US economy suffered a recession in 1937-38 when the yield curve was only slightly less steep than currently – see previous post.

A modified leading index excluding the yield curve rose by only 0.4% in the six months to June – see chart – and has fallen by 0.9% over the last three months.

The view here remains that a "double dip" will be avoided as long as real narrow money continues to expand – it rose solidly in June – and the 10-year yield remains above 2.5%. Economic data, however, may continue to disappoint over the next few months.