Bryce G. from Bentonville, AR asks: Hello Mitch, my question is about leading economic indicators. I saw in a news report last week that an index of leading economic indicators has been weak for the past two years, and has also been predicting a recession for a long time. But now they’ve just given up the recession call, even though the data is still pretty bad. What do you make of this?
Mitch’s Response:
Thanks for writing, Bryce. For readers who may need a bit more clarity, I think you’re referring to the Conference Board’s Leading Economic Index (LEI), which is now in its 23rd month of consecutive declines. I’ve referred to the Conference Board’s LEI in my writings before, as it’s historically been a highly reliable predictor of U.S. economic expansions and recessions.1
But that hasn’t been the case recently.
Starting in July 2022, the Conference Board began signaling that an economic recession was near, based on monthly declines in the LEI. The yield curve also inverted for the first time around October 2022, which made the Conference Board’s calls for recessions look quite prescient at the time. Nearly every post-war recession was preceded by a yield curve inversion.
But the U.S. economy had other plans, so to speak. Economic output, job creation, and consumer spending all accelerated from the time of those first recession calls, and continued at above-trend levels for most of 2023. Not only was the Conference Board wrong, they were wrong by a lot.
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As Bryce mentions in his question, the Conference Board has now officially given up its recession call. According to the senior manager of business cycle indicators at the Conference Board, Justyna Zabinska-La Monica: “While the declining LEI continues to signal headwinds to economic activity, for the first time in the past two years, six out of its 10 components were positive contributors over the past six-month period,” adding that “as a result, the leading index currently does not signal recession ahead.”
To be fair, the Conference Board has a disciplined process for forecasting recessions based on what the data tells them. This is therefore a new forecast based on improvements in key data points in the latest reading. Even still, the Conference Board has decisively not turned optimistic, as they’re predicting essentially zero growth in Q2 and Q3, which current economic fundamentals argue against.
Not only has strength in the labor market persisted, but credit is flowing despite the higher interest-rate environment, and new orders in manufacturing (which had previously weighed down LEI) are improving. In terms of what I make of all this, I’d say that it’s a reminder that a single indicator or data point is not sufficient in forecasting the direction of the economy and/or stocks. In the case of LEI, the flaw may be that the index places quite a bit of emphasis on manufacturing when we know the U.S. is a predominantly services-based economy.
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