Leading Indicators Report Not Predicting Recession Yet

by: Rick Pendergraft

Last month, I wrote an article entitled “Why is Wall Street so Happy?” in which I talked about the predictive powers of the Leading Indicators report. Here is a clip from that article:

According to Briefing.com, ‘the recession alarms go off when the cumulative 6 month decline exceeds -1% amid a string of three or more consecutive monthly declines. No recession warning bells yet.’ The cumulative number for the last five months is -0.2. That makes next month’s Leading Indicators report extremely important. If negative again, it would mark the third consecutive such month. More importantly, depending how low the number is, the cumulative decline for six months could reach the negative one-percent level. If it’s -0.8 or worse, or if the February figure is revised downward (as January’s was), it could send dangerous smoke signals about the U.S. economy.

Last week, the March Leading Indicators report was released and it showed a reading of 0.1 percent, matching the consensus estimate. But February’s reading was revised lower to -0.6 percent from the originally reported -0.5 percent. The clip above mentions how the six-month cumulative reaching negative one percent is an ominous sign for the economy, especially if it comes during a three-month stretch of declines.

Well, the March report halted the string of declines for now, but what if the March number gets revised lower next month the way February was last week and the way the January reading was revised lower in March? There is little wiggle room for the March number to be revised lower without it becoming negative.

Something else to consider is that the five-month cumulative is still sitting at -0.2 percent, but the oldest of these five numbers are the November (flat) and December (up 0.6 percent) reports. When these two numbers drop off in the next two months, it will be very important to see what they are replaced with for April and May. If the numbers for these two months are negative or only slightly positive, the six-month cumulative number will have a hard time staying above the magic number of -1.0 percent.

I will reiterate what I said last month - you should not base “trading” decisions off long-term information like this, but you should keep these types of statistics in mind when you are making “investment” decisions.

I have given my breakdown of the three types of market participants before, but it deserves repeating. Traders are those that are in and out of the market in a short period of time (a few hours to a few days). Speculators are in and out of trades in a few days to a few weeks. Investors are in for the long haul, holding investments for months or years.

It is important that you understand the differences between these classifications. So when I say “trading’ decisions versus “investment” decisions, you will be able to make the distinction between the two terms, at least from my way of looking at things.

I will revisit the Leading Indicators report next month to see whether there is cause for concern and will provide readers with any recommendations that may come from that observation.