Leading Indicators Allay Fears Of A Looming Recession

Dulan Lokuwithana profile picture
Dulan Lokuwithana


  • Leading Economic Indicators have gained importance in forecasting the onset of the next stage of the business cycle as the Fed has adopted a more data-centric approach recently to determine.
  • Ranging from consumer expectations and new housing construction to manufacturing hours and vendor performance, leading economic indicators could establish a likelihood of a late expansionary phase.
  • However, the stock market indices, interest rate spread, unemployment, and manufacturing activity had sent a mixed signal on the strength of the economy.
  • Energy price surges amid supply-side constraints and more Fed rate hikes despite slower real M2money supply could hasten a slowdown in the economy most likely in late 2019.

Investment Thesis

Consisting early and late expansions, peaks, recessions and troughs, business cycles which typically last 1 – 12 years are a recurrent feature in an enterprise-based economy.

With almost a decade passed since the end of the last recession in June 2009, the current business cycle has recorded the second longest expansion in history according to the National Bureau of Economic Research (NBER).

US GDP Growth Rate and Recessions

Sources: The author; Data from Bureau of Economic Analysis (BEA) and National Bureau of Economic Research (NBER)

Amid US-China trade tensions and Fed rate hikes, with economic growth easing to 3.4% in 2018’Q3 from 4.2% recorded in 2018’Q2, further brakes on the economy in late 2018 from stock market volatility and partial government shutdown could push the economy to the brink of a recession.

In a time when the Federal Reserve has leaned towards data to drive its future policy direction, this article analyses some of the widely-used leading economic indicators in an attempt to forecast an imminent danger of a recession to the US economy.

Coincident Indicators conclude a boom

The coincident indicators only verify the existing stage of the business cycle. All three criteria as analyzed below clearly confirm the boom stage of the economy.

When the manufacturing output reached a 10-month high in December 2018, the Industrial Index had risen for 7 months in succession.

MoM Increase in Industrial Index

Sources: The author; Data from Federal Reserve Bank of St. Louis and the Federal Reserve of the United States

Meanwhile, the number of employees on non-farm payrolls also posted a 10-month high in December 2018.

Non Farm Payroll Employees Added

Sources: The author; Data from Federal Reserve Bank of St. Louis

The aggregate real personal income (less transfer payments) therefore has expanded by c.1.8% up to November 2018 (cf. c. 2.7% in 2017) with an overall growth of c.28.0% from the end

This article was written by

Dulan Lokuwithana profile picture
A research analyst with CFA (US) Level I & II qualifications, and CIMA (UK) full qualification, Dulan primarily covers Health-care and Restaurant Stocks for Seeking Alpha. A Graduate in Human Biology, Dulan's expertise in the industry refines his Health-care analysis, and the sheer passion in cuisines spices up the Restaurant sector coverage. With a focus on medium to long-term investment horizon, Dulan hopes to uncover investment opportunities in mid-cap to large-cap stocks less well covered by the analysts.

Disclosure: I/we have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours. I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.

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