Those Who Fail to Learn from the Leading Indicators Are Bound to Be Late on Their Recession Call

By: Paul Kasriel | Mon, Oct 20, 2008
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On a year-over-year basis, the quarterly average of the index of Leading Economic Indicators (LEI) began contracting in the first quarter of 2007. With the exception of the third quarter of 2007, the quarterly average of the LEI has continued to contract. We alerted our readers that multiple consecutive quarters of year-over-year contractions in the LEI usually were the harbinger of recessions. We had ignored the history of the LEI's recession-predictive powers in the past and were determined not to repeat that mistake. Many of our mainstream peers mocked the message being sent by the Leading Indicators, derisively referring to them as the Mis-Leading Indicators. Now, of course, everyone knows that the U.S. economy has entered a recession even though the NBER has not gotten around to acknowledging it. We also knew that the S&P 500, a component of the LEI, usually peaks before a recession sets in. That is why it is helpful for investors to know when a recession is imminent. It does investors little good to know it months after the recession has begun.

The index of Coincident Economic Indicators (CEI) peaked in October 2007. It is likely that the NBER will declare that the onset of this recession began in the first quarter of 2008.

Below is a chart of the year-over-year percent changes in the quarterly averages of the LEI and the CEI. Investors might be wise to study it, save it and update it.

Chart 1

 


 

Paul Kasriel

Author: Paul Kasriel

Paul L. Kasriel
Director of Economic Research
The Northern Trust Company
Economic Research Department
Positive Economic Commentary
"The economics of what is, rather than what you might like it to be."
50 South LaSalle Street, Chicago, Illinois 60675

Paul Kasriel

Paul joined the economic research unit of The Northern Trust Company in 1986 as Vice President and Economist, being named Senior Vice President and Director of Economic Research in 2000. His economic and interest rate forecasts are used both internally and by clients. The accuracy of the Economic Research Department's forecasts has consistently been highly-ranked in the Blue Chip survey of about 50 forecasters over the years. To that point, Paul received the prestigious 2006 Lawrence R. Klein Award for having the most accurate economic forecast among the Blue Chip survey participants for the years 2002 through 2005. The accuracy of Paul's 2008 economic forecast was ranked in the top five of The Wall Street Journal survey panel of economists. In January 2009, The Wall Street Journal and Forbes cited Paul as one of the few who identified early on the formation of the housing bubble and foresaw the economic and financial market havoc that would ensue after the bubble inevitably burst. Through written commentaries containing his straightforward and often nonconsensus analysis of economic and financial market issues, Paul has developed a loyal following in the financial community. The Northern's economic website was listed as one of the top ten most interesting by The Wall Street Journal. Paul is the co-author of a book entitled Seven Indicators That Move Markets.

Paul began his career as a research economist at the Federal Reserve Bank of Chicago. He has taught courses in finance at the DePaul University Kellstadt Graduate School of Business and at the Northwestern University Kellogg Graduate School of Management. Paul serves on the Economic Advisory Committee of the American Bankers Association.

The opinions expressed herein are those of the author and do not necessarily represent the views of The Northern Trust Company. The information herein is based on sources which The Northern Trust Company believes to be reliable, but we cannot warrant its accuracy or completeness. Such information is subject to change and is not intended to influence your investment decisions.

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