– by New Deal democrat
The long leading indicators: on the cusp of turning negative?
A “long leading indicator” is an economic metric that reliably turns a year or more before the onset of a recession.
Geoffrey Moore, who for decades published the Index of Leading Indicators, and in 1993 wrote Leading Economic Indicators: New Approaches and Forecasting Records identified 4:
- housing permits and starts
- corporate bond yields
- real money supply
- corporate profits
A variation of the above is Paul Kasriel’s “foolproof recession indicator,” which combines real money supply with the yield curve, i.e., the difference in the interest rate between short and long term treasury bonds. This turns negative a year or more before the next recession about half of the time.
Another long leading indicator has been described by UCLA Prof. Edward E. Leamer who has written that “Housing IS the Business Cycle.” In that article he identified real residential investments as a share of GDP as an indicator that typically turns at least 5 quarters before the onset of a recession
Several other series appear to have merit as long leading indicators as well.
Real retail sales in several forms also has value as a long leading indicator. Doug Short has identified real retail sales per capita as another important metric. In a similar vein, Steven Hansen of Econintersect has flagged retail employment vs. real retail sales as turning significantly in advance of recessions.
It also appears that the Fed’ Labor Market Conditions Index also turns negative serves as a long leading indicator, typically turning negative at least one year before the onset of a recession.
Finally, the tightening of credit conditions also appears to have merit as a long leading indicator. Two measures, the Senior Loan Officer Survey, and the TED spread, are worth noting.
That gives us a total of 9 varieties of long leading indicators. All of these economic series have a long term history of turning a year or more before a recession.
I haven’t examined these in detail since the beginning of July. Then, I found them just slightly positive on balance. In light of recent interest rate moves, now is a good time for an update.