Most Popular
1. Banking Crisis is Stocks Bull Market Buying Opportunity - Nadeem_Walayat
2.The Crypto Signal for the Precious Metals Market - P_Radomski_CFA
3. One Possible Outcome to a New World Order - Raymond_Matison
4.Nvidia Blow Off Top - Flying High like the Phoenix too Close to the Sun - Nadeem_Walayat
5. Apple AAPL Stock Trend and Earnings Analysis - Nadeem_Walayat
6.AI, Stocks, and Gold Stocks – Connected After All - P_Radomski_CFA
7.Stock Market CHEAT SHEET - - Nadeem_Walayat
8.US Debt Ceiling Crisis Smoke and Mirrors Circus - Nadeem_Walayat
9.Silver Price May Explode - Avi_Gilburt
10.More US Banks Could Collapse -- A Lot More- EWI
Last 7 days
Stock Market Volatility (VIX) - 25th Mar 24
Stock Market Investor Sentiment - 25th Mar 24
The Federal Reserve Didn't Do Anything But It Had Plenty to Say - 25th Mar 24
Stock Market Breadth - 24th Mar 24
Stock Market Margin Debt Indicator - 24th Mar 24
It’s Easy to Scream Stocks Bubble! - 24th Mar 24
Stocks: What to Make of All This Insider Selling- 24th Mar 24
Money Supply Continues To Fall, Economy Worsens – Investors Don’t Care - 24th Mar 24
Get an Edge in the Crypto Market with Order Flow - 24th Mar 24
US Presidential Election Cycle and Recessions - 18th Mar 24
US Recession Already Happened in 2022! - 18th Mar 24
AI can now remember everything you say - 18th Mar 24
Bitcoin Crypto Mania 2024 - MicroStrategy MSTR Blow off Top! - 14th Mar 24
Bitcoin Gravy Train Trend Forecast 2024 - 11th Mar 24
Gold and the Long-Term Inflation Cycle - 11th Mar 24
Fed’s Next Intertest Rate Move might not align with popular consensus - 11th Mar 24
Two Reasons The Fed Manipulates Interest Rates - 11th Mar 24
US Dollar Trend 2024 - 9th Mar 2024
The Bond Trade and Interest Rates - 9th Mar 2024
Investors Don’t Believe the Gold Rally, Still Prefer General Stocks - 9th Mar 2024
Paper Gold Vs. Real Gold: It's Important to Know the Difference - 9th Mar 2024
Stocks: What This "Record Extreme" Indicator May Be Signaling - 9th Mar 2024
My 3 Favorite Trade Setups - Elliott Wave Course - 9th Mar 2024
Bitcoin Crypto Bubble Mania! - 4th Mar 2024
US Interest Rates - When WIll the Fed Pivot - 1st Mar 2024
S&P Stock Market Real Earnings Yield - 29th Feb 2024
US Unemployment is a Fake Statistic - 29th Feb 2024
U.S. financial market’s “Weimar phase” impact to your fiat and digital assets - 29th Feb 2024
What a Breakdown in Silver Mining Stocks! What an Opportunity! - 29th Feb 2024
Why AI will Soon become SA - Synthetic Intelligence - The Machine Learning Megatrend - 29th Feb 2024
Keep Calm and Carry on Buying Quantum AI Tech Stocks - 19th Feb 24

Market Oracle FREE Newsletter

How to Protect your Wealth by Investing in AI Tech Stocks

Leading Economic Indicators Predict the Recession is Over

Economics / Economic Recovery Aug 26, 2009 - 08:51 AM GMT

By: Money_and_Markets

Economics

Best Financial Markets Analysis ArticleClaus Vogt writes: Last Thursday the Conference Board released the July reading of its Index of Leading Economic Indicators (LEI). Year-over-year it was up by 0.2 percent. This is the first reading in the plus column since 2007.

So … what does this clear improvement tell us? How important is it? Does it give us an all clear signal that a strong recovery is on its way?


The LEI Is a Very Successful Recession Predictor …

The LEI is the most successful recession predictor I know of. It has forecast every recession since 1960, an accomplishment the vast majority of well-known economists and the Fed can only dream of.

Whenever the year-over-year percentage change fell below the zero line for three consecutive months, a recession followed suit. There was, however, one minor exception: In 1966 the LEI predicted a recession, but the economy technically barely averted one …

In 1966, the LEI stumbled. It had predicted a recession, but the economy technically barely averted one ...
In 1966, the LEI stumbled. It had predicted a recession, but the economy technically barely averted one …

Growth slowed dramatically, earnings stumbled, and the stock market was hit hard. But according to the official arbiter of recessions, it wasn’t a recession. Even though for all practical intents and purposes it definitely felt like one — and in Europe it actually was a severe recession.

In 2007 a New Pattern Emerged …

At the beginning of 2007 the LEI started to send warning signs. But its behavior was a little strange. The year-over-year change fell below zero. Then it rose back to positive readings, creating a pattern it had never done before …

In previous cycles it had always accelerated to the downside after getting negative for more than two months. This time, though, after a few months of soft landings, it fell below the zero line again, but now it was for real.

And for the rest of 2007 and all of 2008, the percent change of the LEI continually got much worse!

  •  In November and December 2008 the LEI had fallen to -4.0 percent.
  •  In January it recovered a little to -3.8 percent.
  •  In February it went down to -3.9 percent and again to -4.0 percent in March.

Then it got better …

  •  To -3.0 percent in April, -1.8 percent in May,
  •  And -1.1 percent in June to the already mentioned +0.2 percent in July.

These numbers show that the turning point during the current cycle was between March and April 2009.

So in 2007 the LEI had done it again: For the eighth time since 1960 it had correctly forecast a recession.

The LEI Signals the End of the Recession — But Nothing More …

After getting better three months in a row and rising above the zero line during the fourth month, the LEI is telling us that this severe recession will be over soon. That’s a positive message.

Although it does not tell us that a strong or long-lasting recovery is now in front of us. Yet that’s what most economists are saying! Many of these experts are the same ones who didn’t see the recession coming in the first place.

How do they know?

This isn’t a garden variety post-WWII recession ... the kind that almost always shows a strong rebound after a recession.
This isn’t a garden variety post-WWII recession … the kind that almost always shows a strong rebound after a recession.

Well, they don’t, of course. They’re still hoping that this recession will finally turn out to be a garden variety post-WWII recession — which it isn’t by a mile. They hope for a repeat of the typical post-WWII business cycle pattern … the kind that almost always shows a strong rebound after a recession.

Only the events after the 1980 recession diverged from this script. Back then the LEI shot up to nearly 5 percent, but soon thereafter it relapsed into negative territory. Sure enough, the blossoming recovery was aborted, and another recession began by the end of 1981. And it was more severe than its predecessor and lasted much longer.

What does the history of the LEI tell us then?

It signals the end of the recession … and nothing more. It tells us nothing about the quality of the recovery — its length or its strength.

This Is Not a Garden Variety Recession — Be Careful

This is obviously not a garden variety recession. It’s the result of a huge burst real estate bubble. Hence I deem it very dangerous to treat it like a normal post-WWII business cycle.

The real problems of the economy have not been solved by the Fed’s easy money policy, by the big bank rescues or by the stimulus programs …

The real problems — too much bad debt, overleverage, a sick banking sector, and an over-stretched consumer — are still with us. If history is any guide, a huge deleveraging process will weigh as a major negative on the economy for many years to come. That’s why the prediction of a normal and strong economic recovery seems to be based much more on hope than on reality.

For now, the worst of the post real estate bubble crisis seems to be over. That’s the message that the LEI currently confirms. But I suggest that you keep watching this recession predictor during the coming months … a new message could be given any time. And the long– awaited, stimulus-based recovery may turn out to be short lived.

Best wishes,

Claus

This investment news is brought to you by Money and Markets . Money and Markets is a free daily investment newsletter from Martin D. Weiss and Weiss Research analysts offering the latest investing news and financial insights for the stock market, including tips and advice on investing in gold, energy and oil. Dr. Weiss is a leader in the fields of investing, interest rates, financial safety and economic forecasting. To view archives or subscribe, visit http://www.moneyandmarkets.com .

Money and Markets Archive

© 2005-2022 http://www.MarketOracle.co.uk - The Market Oracle is a FREE Daily Financial Markets Analysis & Forecasting online publication.


Post Comment

Only logged in users are allowed to post comments. Register/ Log in