Caution Indicator of 65 years shows red signals for recession
A variety of economic indicators have recently shown signs of a possible recession in the midst of ongoing general uncertainty.
Adding to these indicators is the United States Leading Economic Index (LEI), which is indicating a worrying trend in the current market cycles.
According to data shared by Global Markets Investor in a post on June 24, the LEI has dropped by 14.7% from its recent peak in this economic cycle. This significant decline has historically signaled the start of recessions over the past 65 years.
The data, sourced from Bloomberg Finance and updated as of June 21, 2024, illustrates this concerning trend. The LEI includes important economic indicators such as labor market data, manufacturing sector data, building permits, S&P 500 performance, and bonds.
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 sharp drop from its recent peak. If the historical pattern holds true, this suggests that the US economy might be heading toward another recession.
This emphasizes how crucial these indicators have been 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.
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 signaling 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 signaled 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.
Meanwhile, with uncertainty around the recession, attention is on the Fed’s next monetary policy.
