Thursday, August 6, 2009

According to LEI, the recession is over

History can teach us amazing things about the state of our economy, if one only knows where to look. The history of Conference Board's Index of Leading Economic Indicators (LEI) had been a consistent predictor of recoveries throughout history. Here we plot quarterly changes in LEI against quarterly changes in the US GDP.

Quarter over quarter LEI and GDP. Red circles indicate periods of contraction.

When LEI experienced a strong uptick during previous periods of GDP contraction, GDP growth quickly followed. This worked every time, since 1960 and it happened 7 times (shown by arrows in the chart above). Note that LEI is a superb predictor on the upside - as the US came out of recessions. It doesn't work as well in predicting a start of a recession. Also the magnitude of the LEI move is not a predictor of the size of the GDP growth, it's only predicting direction.

June-09 showed a 2% quarter over quarter pop in LEI. GDP is sure to follow. Severe problems remain in the economy and unemployment may yet continue to rise. But in past downturns, unemployment and other recession indicators such as delinquencies did not peak until well into the economic recovery. It is possible we may be looking a "W" type recovery. such as the one we had in the early 80s. Nevertheless we should see positive GDP growth in the next couple of quarters.
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