Recession watch

To watch for signs of an impending recession, I am grateful to New Deal democrat for his long leading indicator framework, which he adapted from Geoffrey Moore (see his post where he outlined his methodology here). This technique is designed to spot a recession a year in advance.

New Deal democrat monitors seven long leading indicators and his comments are shown in parenthesis after each indicator (click on links for the latest FRED charts):

  • Corporate bond yields (Corporate bond yields have always made their most recent low over 1 year before the onset of the next recession)
  • Housing starts (Housing starts peaked at least one year before the next recession)
  • Money supply (In addition to the 1981 “double dip,” on only 2 other occasions have these failed to turn negative at least 1 year before a recession)
  • Corporate profits and Proprietors` income, which can be a more timely proxy for corporate profits (Corporate profits have peaked at least one year before the next recession 8 of the last 11 times, one of the misses being the 1981 “double-dip.”)
  • Yield curve, which may not be relevant in the current interest rate environment (The yield curve inverted more than one year before the next recession about half the time)
  • Residential real private investment (Aside from the 1981 “double-dip,” and 1948, it has always peaked at least one year before the next recession)
  • Real retail sales (It has peaked 1 year or more before the next recession about half of the time)

New Deal democrat qualified the usefulness of these indicators in the following way:

Note that none of the indicators are perfect. None of them forecast the 1981 “double-dip,” which was engineered by the Volcker Fed.  If the Fed similarly decided to raise rates aggressively in the next 6 – 9 months, or if there were an Oil price spike caused by a Middle eastern War, a recession could happen anyway.

In addition, I also use Georg Vrba’s work as another way of watching for possible recessions on the horizon:

Other indicators of interest:

  • Atlanta Fed’s GDPNow (nowcast of GDP growth)
  • Chicago Fed National Financial Condition Index and St. Louis Fed Financial Stress Index (FRED graph)
  • US high yield (junk bond) spreads vs. Emerging Market bond spreads (FRED graph)
  • Fed funds rate vs. Taylor Rule interest rate, assumes 2% inflation target and 2% real rate (for details see Building the ultimate market timing model, FRED graph)
  • Temporary jobs, which is a leading indicator of employment trends (FRED graph)
  • Labor Market Conditions Index, which is another leading indicator of employment trends (FRED graph)