Leading Astray: What the LEI & Our Probit Model Say About Recession

Source: Economics Group of Wells Fargo Bank, N.A.

Summary

A fourth straight monthly decline in the LEI does not guarantee recession, but it makes it harder to avoid. In this report we consider the downtrend in this barometer alongside our own Probit model, which relies in part upon the LEI, to offer some empirical evidence of impending recession.

Follow My Lead

The trouble with recession alarms that never miss is that by the time they go off, the economy is already in recession. June marked the fourth consecutive monthly drop in the leading economic index (LEI), and strings of declines have historically been consistent with recession; it would not be much of a leading index if that were not the case. The argument isn’t perfectly air-tight, which is to say we don’t have an explicit principle that says after a certain number of negative prints the economy always falls into recession. What we can say is that a recession is always led by a trend decline in the LEI as a quick glance at Figure 1 demonstrates. One way to smooth the monthly noise is to look at a six-month average of the monthly changes, which is rarely negative outside an economic downturn (Figure 2). Here we do have something airtight to say: the six-month change has never been below -0.4% without a recession over the past sixty years. Today’s release puts that figure at -0.31% through June. READ FULL ARTICLE>>