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By New_Deal_democrat December 11, 2013 6:29 am
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A closer look at the long leading indicators for the US economy

For the last few months, in my "Weekly Indicators" column I've expressed some level of concern about the "long leading indicators," i.e., those measures which usually turn up or down a year or more before the economy as a whole does.  At the same time, I have stressed that most of them  remain positive.  As a result, I expect growth to continue in the US economy at least through the first three quarters of next year.

Let's take a more detailed look.  First of all, here is a graph of the YoY percentage change in each of the 4 indicators, normed so that their scale is approximately equal: Real M2 (blue), corporate profits (red), housing permits (green), and long term corporate bond yields (inerted)(orange):

As you can see, at any given point in the two years before the 2008-09 "Great Recession," 3 of the 4 measures were negative YoY, and a few months before the onset of that recession, all 4 had turned negative.

At the end of 2010 and beginning of 2011, all 4 skirted turning negative again, which undoubtedly played into ECRI's unfortunate late 2011 recession call.

In the last half year, interest rates once again turned seriously negative YoY.  But they have not been joined by any of the other 3 indicators, although to some extent all three have deteriorated.

Another way of looking at these indicators is to amalgamate them into one average measure, which is what the graph below does:

At some point within a year of each of the last 4 recessions, the average turned negative, although as you can also see on other occasions a negative average reading did not forecast a recession.  In general, the longer and deeper a downturn below zero YoY, the greater the likelihood of an ensuing recession.

The final graph is a close-up of the last 10 years, through the third quarter of 2013:

As you can see, while the average measure has clearly deteriorated, it remains positive, signaling that no recession is on the horizon through at least the third quarter of 2014.

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