Weekly Update: Week 16
In this Weekly Update, we will reiterate why a recession is either already underway or virtually certain to occur in the immediate future by reviewing the update to the Conference Board Leading Index and the Aggregate and Cyclical Coincident Indexes.
As a reminder, I recently published a blog post outlining three sequential signals of recession using the Conference Board Leading Index and two proprietary EPB Coincident Indexes. You can read that post by clicking here.
The quick summary is that we can improve the window of our recession timing by using sequential signals across leading and coincident data.
Coincident data does not tell us where the economy is heading in the future, but it most accurately defines the economy and how most people feel on a daily basis.
Leading indicators like the Conference Board Leading Index graphed here, do provide insight into Coincident data three to six months in the future with a high degree of success.
In the March update, the Leading Index plunged to a growth rate of -8.1%, a new cyclical low and a level that is clearly not seen outside of recessions. It is historically unusual to see the Leading Index register a growth rate of -8.1% with the economy not already in recession.
Going back to the late 1960s, the average recession start date occurred when the Leading Index registered a growth rate of -4.8%. The Conference Board sets a recession threshold at -4.2%, which is the median of the past recession start dates.
In either case, today’s growth rate of -8.1% is far worse than the average recession start.
Leading indicators are broadly sounding a loud and imminent recession signal. Coincident data has been drifting lower, but has not “plunged” into recessionary territory yet.
The Aggregate Coincident Index, which uses the six-NBER variables, is growing at a 1.6% annualized rate and the Cyclical Coincident Index, which focuses exclusively on residential construction and manufacturing, is growing at a 0.7% annualized rate.
The second signal of recession, the signal that tells us a recession is imminent, is when the Leading Index is negative, and the coincident indicators are below 2%. This recession signal was registered emphatically in December of last year and has only grown stronger as the Leading Index continues to plunge.
At this point, when a large gap opens between the leading data and the coincident data, the common view is that “maybe this time is different.”
It’s important to remember that “leading indicators” is not a mythical concept. Leading indicators are data points that mechanically lead broader economic activity.
For example, a housing completion always follows a housing start or the issuance of a new building permit. Construction output can’t occur without first having a permit and a start.
The lag between start and completion, however, is variable.
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