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

October 20, 2008

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

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 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."
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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.