This “3D” Warning Signal Shows A Recession Coming Right At You

This “3D” Warning Signal Shows A Recession Coming Right At You
Stéphane Renevier, CFA

7 months ago2 mins

The Conference Board Leading Economic Index (LEI) and its lesser-known “3D rule” may be your best bet at predicting what’s next for the economy.

The LEI is a mix of indicators that reveal where things are headed – measuring things like new orders, unemployment claims, consumer sentiment, and stock market performance. When those indicators are weakening, the LEI falls, and that signals a higher risk that the whole economy is about to shrink.

But to unlock the full predictive power of the LEI, you’ll need to pay close attention to the “3D rule”: it looks at the LEI decline from all sides – the duration, depth, and diffusion. Duration and depth are measured by how much the index changed over the past six months (blue line). And diffusion looks at how many components are on the decline. The 3D rule sends an official recession signal (red line) when the diffusion index slips below 50 (black dotted line) and when the index drops by more than 4.2% across the previous six months (left axis). When both happen at the same time, you should pay close attention.

The 3D rule triggered a recession signal last July, and it’s continued to deteriorate since then, with more components weakening and the longest downward streak since 2008. In fact, the 3D rule shows we’re now at levels not seen since the Covid crisis, and before that, since 2008. Now, this doesn’t necessarily mean we’ll suffer a similarly harsh recession. But the “3D” message is crystal clear: economic weaknesses are likely to intensify and spread more widely throughout the US economy over the coming months.

That’s going to be good news for bringing down inflation, but bad news for companies profits. That’s not something stock investors seem ready for. In this environment, you might want to be defensively positioned, favoring Treasury bonds and gold, over stocks and other commodities.



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