Will a Reliable Recession Indicator Become Unreliable?

For decades, the U.S. Conference Board’s Index of Leading Economic Indicators (LEI) has been a reliable predictor of a coming recession.
 
In the graph below, the vertical shaded areas indicate periods of a U.S. recession. The LEI always turns down at some point, and often several months, before a recession begins. The Conference Board’s graph points out that the LEI peaked in February 2022.


 
(Click this link for a graph with an additional decade added in.)
 
The Conference Board recently announced, “The LEI is down 3.4 percent over the six-month period between March and September 2023, an improvement from its 4.6 percent contraction over the previous six months (September 2022 to March 2023).” That marks a year and a half of consecutive monthly declines.
 
The statement continues, “In September, negative or flat contributions from nine of the index’s ten components more than offset fewer initial claims for unemployment insurance. Although the six-month growth rate in the LEI is somewhat less negative, and the recession signal did not sound, it still signals risk of economic weakness ahead.”
 
There has been a long-running debate about whether the Federal Reserve Bank’s interest-rate increases would push the country into a recession. For a year or more, economists and many business leaders expected a recession in the coming months.
 
Those recession fears have receded over the past few months, as inflation pressures have slowly declined and consumer spending and GDP have remained strong. But as the Conference Board points out, while the “recession signal” hasn’t emerged the indicators are still heading in the wrong direction.
 
For example, foreclosures on certain high-risk property loans have been increasing, holiday hiring demand has dropped off, China’s economy is in the dumps, and oil futures are down even as OPEC has cut production, implying investors expect of an economic slowdown.
 
If the LEI remains negative, it’s reasonable to think the country may enter a recession sometime next year, or at least get close to it, just as the presidential campaign is taking off.  If that happens, President Biden might find it even more difficult to convince the public how Bidenomics is making their lives better.