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Does the LEI Forecast a Recession?

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LIZ ANN SONDERS:  Today, I want to talk about leading economic indicators, specifically, but more broadly. So, specifically, the index that I pay most close attention to that tracks a subset of individual economic indicators, all of which tend to lead broader trends in the economy is put out by the Conference Board. It’s the Leading Economic Index, the LEI, for short, a fairly well-watched economic data point that comes out on a monthly basis.  Most recently, we got the data for December. Now, the Conference Board did have to estimate two of the variables because of what was the government shutdown at the time, but it’s important overall to look at the trend in the last several months, because for the second time in three months, in the case of December, we saw a decline in the leading indicators. This is important because it could suggest that we saw a peak in that subset of indicators last September, which helps to explain why you’re seeing increased chatter about recession. In the past, peaks in the leading economic indicators, the LEI, in particular, have come about 13 months in advance of recession.

Now, the range around that is from a minimum of about eight months to a maximum of about 16 months. This is in the post-1960 period of time. And it also points out something very important, and a lesson that investors need to heed, especially at inflection points. When it comes to the relationship between economic data points in the stock market, most often it’s the case that better or worse tends to more than… matter more than good or bad. In other words, the level a lot of the economic data right now is still good. The problem is that we’re starting to see a deterioration and worsening in some of these data points. In fact, over the last several months about 60% of the 10 subcomponents of the LEI have been in worsening trends. So their level is still fairly high, but they’ve started to deteriorate. And this is very important because not only does the stock market tend to key off that rate of change, but it also tends to be an important marker where you start to begin the countdown to the next recession and helps to explain why you’re seeing more recession chatter recently.

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