THE FIVE FINGER GUIDE: ECONOMIC DATA THAT PROVIDE A HEADS-UP TO A U.S. RECESSION

Recession cries for the U.S. economy reached a feverish pitch among investors at the start of this year, as less-than-encouraging data were released on employment, manufacturing activity and retail sales. Some analysts have even gone so far as to postulate that the U.S. is currently in the midst of a recession, but because of reporting delays of data, the evidence won’t become known for some months yet. Alongside the doomsayers are those, like ourselves, who believe the U.S. is not in a recession, but that doesn’t mean that the economy will avoid hardships. And, most analysts in this camp can agree that the risks are quite high for a U.S. recession, with our odds placed at 40%.

So what might investors look at to gauge recession risks and the tipping point? There isn’t a single silver-bullet leading economic indicator that can perfectly predict recessions every time, but we’ve put together five indicators that have historical precedence in calling it right. These include: interest rate spreads, manufacturing ISM index, initial jobless claims, residential building permits, and private sector employment. Readers should note that these indicators are not meant to reflect an exhaustive list or perfect predictors of recessions. But, they do provide an easy-to-follow short-list that help gauge economic momentum. They are available with minimal delay and are not subject to great revisions (except in the case of employment data). In addition, each one contains a nugget of information or basic rule of thumb that has generally withstood the test of time. The recession markers used in this paper follow the official NBER definition, usually consisting of two or more quarters of declining real GDP, but not in all cases since they use a broader array of indicators than just real GDP.

Alongside the five economic indicators, we have devised a quick-reference traffic light system to capture whether a particular indicator is signaling recession or not. An indicator that receives a green light means that current patterns or levels are not consistent with its behaviour during past recession episodes. A yellow light means that we are more cautious on the indicator, as it is already signaling an economic slowdown that could eventually deteriorate or approach past recession levels. A red light indicates that the economic indicator is already behaving in a similar fashion to past recession episodes. The economic indicators below are in no particular order of significance.

Beata Caranci, Director of Economic Forecasting
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