Leading Indicators Positive

Leading Economic Indicators for the month of November came in higher than expected this morning, rising 0.6% versus estimates for an increase of 0.5%. One way we like to track the index of Leading Economic Indicators is to compare its ratio vs the index of Coincident Economic Indicators. The chart below shows the monthly ratio going back to 1959 with recessions highlighted in gray.

If you aren’t familiar with this ratio, it tends to rise during economic expansions and then roll over in advance of recessions. Then, towards the end of the recession, the ratio bottoms out and starts to improve. Even ahead of the current recession, the LEI/CEI ratio peaked in September 2018. While the pace of the decline wasn’t nearly as steep as it was heading into prior recessions, the weakness in the ratio suggests that the economy was already at risk of a slowdown before the COVID outbreak. Who knows? If COVID never happened, maybe the US economy would have experienced a recession at some point in 2020 anyway.

While it’s a bit hard to see in the chart above, as the shorter-term chart of the LEI/CEI ratio below shows, November’s reading isn’t far from the pre-recession highs reached 26 months ago. Why is this important? For starters, at 26 months, the current streak without a new high isn’t even the longest we have seen since the end of the financial crisis. The longest streak without a new high was 27 months from mid-2011 through mid-2013. Therefore, if the ratio rises again next month and makes a new high, it will be tied with that prior streak, one which didn’t even result in a recession. More importantly, though, in every prior recession since 1960, the LEI/CEI ratio has never been this close to a new high and still in a recession. This means one of two things – either the LEI/CEI ratio has become flawed or the recession that began in February has been over for months.  

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