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Warning: 65-year recession indicator flashes red

Warning: 65-year recession indicator flashes red
Paul L.

Several economic indicators have recently reflected warning signs of a possible recession amid lingering general uncertainty.

Adding to this multitude of indicators is the United States Leading Economic Index (LEI), which is painting a concerning trend in the current market cycles.

According to data shared by Global Markets Investor in an X post on June 24, the LEI has plummeted by 14.7% from its recent peak in this economic cycle. This substantial decline has historically signaled the onset of recessions over the past 65 years.

Leading US economic indicator chart. Source: Bloomberg.

The data, sourced from Bloomberg Finance and updated as of June 21, 2024, illustrates this worrying trend. The LEI encompasses crucial economic indicators such as labor market data, manufacturing sector data, building permits, S&P 500 performance, and bonds.

Consistency in predicting recessions 

Historically, every time the LEI experienced a similar decline, the US economy was either in or entering a recession. These periods correspond to past recessions, showing a consistent pattern where a decline of this magnitude was a precursor to economic downturns.

The current LEI level is 101.20, a steep fall from its recent peak. If the historical pattern holds true, this suggests that the US economy might be heading toward another recession.

This highlights how critical these indicators have been instrumental in predicting economic health, with previous significant drops correlating with recessions in the early ’80s, early ’90s, early 2000s, and during the 2008 financial crisis.

Other recession indicators 

Given the LEI’s historical accuracy in predicting recessions, this recent decline is significant and cannot be ignored. Other historical recession indicators have also been flashing warning signs in recent weeks.

Regarding the labor market, a previous Finbold report noted that permanent job losses are “accelerating aggressively” in the US. Notably, historical data shows that spikes in permanent job losses have consistently heralded recessions since 1995.

Additionally, another Finbold report noted that the Federal Reserve model using the US Treasury yield curve indicates a 52% chance of an economic downturn over the next year. Although this probability has decreased from its peak of 71% in May 2023, a cautious approach remains warranted.

In the meantime, with uncertainty around the recession, attention is on the Fed’s next monetary policy. 

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Paul L.

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