Recession Predictor Short-Cut
By Mel Miller
By Mel Miller, Chief Economist
Fifth in a series of economic updates focused on key economic indicators by our Chief Economist, Mel Miller.
Is the Index of Leading Economic Indicators also a good predictor of recessions? Yes. And no.
The Conference Board (a private research group based in New York City) publishes the Index of Leading Economic Indicators on a monthly basis. Since January 1959, the LEI index has historically provided a glimpse into the direction of the economy in the near term. It is not designed to, nor does it attempt to predict recessions.
The need for such an index is obvious and its track record, while not perfect, provides useful information.
The Index is composed of 10 indicators which, in theory, should swing in the direction the economy will be traveling in the ensuing few months. Each indicator has a unique weight, with the financial indicators and nonfinancial indicators each comprising half of the index.
The largest nonfinancial indicator is the average hourly workweek at 25.4%, while the smallest nonfinancial indicator, manufacturers’ new orders for nondefense capital goods, carries a 1.9% weight.
There are only three financial indicators: inflation-adjusted money supply (35.3%); changes in the S&P500 (3.8%); and the Treasury interest rate spread between fed funds and the 10-year treasury (10.2%).
Year over year through mid-December, the index is up 4.4% and the trend is positive (see chart). If the index is correct, 2014 should be a good year—at least the first few months of the year. I will keep a close watch on this index.
Fifth in a series of economic updates focused on key economic indicators.
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Posted: January 15, 2014