The Conference Board, an independent US think tank, produces leading indicators for many economies. These include data which are thought to lead – that is, move in advance of – the business cycle. For example, average weekly hours for the manufacturing sector are included as a leading indicator because employers tend to reduce work hours before they make staff redundant.
The Conference Board also produces coincident indicators for many economies. These aim to provide an indication of the current state of the business cycle and include data such as net hiring and industrial production.
For the US, the Conference Board also produces a lagging indicator. It includes items that lag – or follow – the business cycle. For example, a series measuring the level of outstanding commercial and industrial loans is included because it tends to peak after the business cycle as falling profits encourage an increase in the demand for loans (sometimes referred to as ‘distress lending’).
Historically, the 6-month annualised change in the leading indicator has been a useful tool for identifying turning points in the business cycle. In October 2007, this measure of the leading indicator passed its recession warning threshold. The US entered recession, according to the National Bureau of Economic Research (NBER), two months later in December 2007. It is notable that this measure is currently signalling a recession in the US.
While the 6-month annualised change in the leading indicator is used by the Conference Board as a recession signal, we use year-on-year changes to assess the general strength of leading and lagging data. At the onset of the recession in 2007, the leading indicator was negative in year-on-year terms. Contrasting this, the coincident and lagging indicators were both still positive. The coincident indicator only turned negative in year-on-year terms five months into the recession and the lagging indicator only did so in the first month following the end of the recession.
In 2020, the Covid pandemic caused a recession. Despite the sudden-stop nature of that recession, it is notable that the leading indicator declined before the coincident and lagging indicators although it was less useful as a predictor of recession than it had been in previous downturns.
The contrasting signals sometimes given by leading and lagging indicators highlight an issue which is particularly important in the current economic climate. While it is plausible that the US economy avoids a recession, the argument should not be based purely on lagging data as it is possible that this data remains strong while the economy is already in recession. Furthermore, even data which are defined by the Conference Board as coincident can remain positive while the economy is in recession.
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