With industrial production, capacity utilization, real disposable income, real personal consumption, real sales retail and food service sales, and real manufacturing and trade sales uniformly declining in their latest reports, coincident economic indicators – having generally peaked in July – are now following through on the weakness that we’ve persistently observed in leading economic measures. We continue to believe that the U.S. economy joined a global economic downturn during the third quarter of this year.
While we use a broad range of signal extraction and noise-reduction methods in our own work, the economic data in recent months has required less and less sophisticated analysis, as many of the most reliable leading economic measures have turned clearly lower (e.g. Philly Fed Index, Chicago Fed National Activity Index, and the new orders and order backlog components of numerous regional and national Federal Reserve and purchasing managers surveys). Still, the leading/coincident/lagging relationships across these indicators remain important. Not surprisingly, analysts have now turned to the last refuge of the economic data, which is to focus on historically lagging measures such as payroll employment.
If you calculate the correlation between various economic measures and recessions in historical data, these leading and lagging relationships can easily be identified (see Leading Indicators and the Risk of a Blindside Recession). Among widely followed economic statistics, it turns out that the Philadelphia Fed Index is among the most reliable single indicators of oncoming recession in the quarter immediately before the downturn. From the start of a recession to about 3 months after it begins, the most reliable early confirmation comes from the 6-month change in industrial production, the new orders components of the Chicago Purchasing Managers Index and the national Purchasing Managers Index for manufacturing (from the Institute of Supply Management), and the percentage change in the 4-week average of new unemployment claims from its 10-month low. Only several months into a recession do employment figures begin to give a reliable confirmation of recession (though initial data is often heavily revised after the fact). In the period 3-6 months after a recession starts, the 6-month change in employment begins to provide a reliable confirmation of recession, and about 7-11 months after a recession starts, the 12-month change in employment reaches its highest cross-correlation with recession. Finally, 12-months after a recession starts, the indicator most strongly correlated with recession turns out to be – no surprise here – the year-over-year change in real GDP.
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