This 10-In-1 Indicator Sees A US Recession Just Ahead

This 10-In-1 Indicator Sees A US Recession Just Ahead
Stéphane Renevier, CFA

over 1 year ago1 min

The Conference Board Leading Economic Index (LEI) is designed as a gauge of whether the economy is about to get better or worse. It’s essentially a weighted average of ten economic indicators that usually turn before the rest of the economy: things like new orders, initial claims for unemployment benefits, the weekly number of hours worked in manufacturing, consumer sentiment, and credit conditions.

The more the LEI falls, the higher the risk that the whole economy will shrink. In fact, every time the LEI’s six-month annualized growth rate (blue line) has dropped below 5%, a recession has followed. And right now, the rate looks pretty worrying: not only did it fall for a fifth-straight month in July, but it fell to levels that were similar to those that preceded the 2001 and 2008 recessions (both of which were accompanied by significant stock market corrections).

This suggests that the “soft landing” scenario – the one in which the Federal Reserve (the Fed) manages to raise interest rates just enough to cool the red-hot inflation without sending the economy into a recession – is becoming increasingly unlikely. And with the Fed unlikely to come to the rescue this time, you might do well to brace yourself for some high volatility ahead. So start to add some long-term government bonds, reduce your exposure to stocks, and hold some cash to take advantage of opportunities as they arise.

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