Log in Open account
Singapore
Recession Watch: Leading economic indicators
Click here to return to Saxo's Recession Watch page

Recession Watch: Leading economic indicators

Macro 8 minutes to read
Christopher Dembik

Head of Macroeconomic Research

Summary:  Evidence is mounting that the world is fast approaching the end of this economic cycle and perhaps, an outright recession. Opinions are many, but what are the facts? In this first article of a new series by our #SaxoStrats team,we take a closer look at the most powerful leading indicators that economists use to predict a recession.

Inverted yield curve

The inverted yield curve is certainly the most critical signal to predict recession. Looking at the two-year/5-year spread, the track record in predicting recessions is about 80%. However, most research papers by the Federal Reserve point to the one-year/10-year spread as the most relevant spread to watch. That being said, an inverted yield curve does not mean that a recession is imminent. Based on the previous decades, it takes an average of 22 months for the recession to happen after the inversion of the yield curve.  
Credit impulse

The notion of Credit Impulse was introduced for the first time by Michael Biggs, in “The Impact of Credit on Growth,” Global Macro Issues, November 19, 2008. Instead of focusing on the stock of credit, Biggs indicates it is more important to focus on the flow of credit to understand the business cycle. He argues that since spending is a flow, that is financed through new loans, it should be compared with net new lending – also a flow – rather than credit outstanding – a stock.

Basically, credit impulse represents the flow of new credit from the private sector as percentage of GDP. It tends to lead the economy by 9 to 12 months and it has a high correlation with US final domestic demand and US private fixed investment. Decelerating credit impulse will lead to slower economic activity and negative credit impulse will produce sharpest slowdowns. Negative credit impulse has a decent track record in prediction recession since it has predicted all the recessions since 1950.
C&I loans and leases 

Commercial & Industrial loans and leases are an important category of assets that commercial banks report on their balance sheets. Its measurement is published by the Federal Reserve on a quarterly basis since 1947. It is usually considered as another reliable indicator of an upcoming US recession. Over the past decades, the contraction in C&I loans and leases has predicted the last three recessions.
The Conference Board Leading Index

The Conference Board Leading Index has been published since 1959. It is a leading indicator of the economic cycle that gives a broad overview of the state of the US economy. It is designed to point out peaks and troughs in the business cycle. It is composed of the ten data below: 

– Average weekly hours, manufacturing
– Average weekly initial claims for unemployment insurance
– Manufacturers’ new orders, consumer goods and materials
– ISM Index of New Orders
– Manufacturers' new orders, non-defense capital goods excluding aircraft orders
– Building permits, new private housing units
– Stock prices, 500 common stocks
– Leading Credit Index
– Interest rate spread, 10-year Treasury bonds less federal funds
– Average consumer expectations for business condition

An annual contraction in the Conference Board Leading Index usually tends to signal recession. It has predicted the 8 past recessions in the USA, but it can also send incorrect signals, like in 1967 and in 1999. The amplitude of the contraction is the key criteria to monitor to assess the likelihood of a recession.
US Consumer Confidence Index

The Conference Board consumer confidence index is published on the last Tuesday of every month. It reflects prevailing business conditions and likely developments for the months ahead. Based on a track record that covers the past 50 years, the index reached its highest level at 144.7 in January 2000 and its lowest level at 25.3 in February 2009.

Even though we agree that history does not always repeat itself, it is interesting to note that, historically, extremely high levels of consumer confidence have been followed by recession and a lost decade, like at the beginning of the 1970s and at the end of the 2000s. Therefore, investors tend to be cautious when high levels are reached since it can be an early signal that an economic downturn is about to start.
 
Paperboard mills

Paperboard mills are what we call an unconventional indicator. Product sales by paper and paperboard mills tend to reflect the evolution of sales and, therefore, give a signal about the future evolution of production. This indicator was highly watched before the 2000s but, due to the digitalisation of the economy, it is certainly less reliable than in the past, though there is still an obvious correlation with the economic cycle.
Click here to return to Saxo's Recession Watch page

Quarterly Outlook

01 /

  • Macro Outlook: The US rate cut cycle has begun

    Quarterly Outlook

    Macro Outlook: The US rate cut cycle has begun

    Peter Garnry

    Chief Investment Strategist

    The Fed started the US rate cut cycle in Q3 and in this macro outlook we will explore how the rate c...
    Read full article
  • Fixed Income Outlook: Bonds Hit Reset. A New Equilibrium Emerges

    Quarterly Outlook

    Fixed Income Outlook: Bonds Hit Reset. A New Equilibrium Emerges

    Althea Spinozzi

    Head of Fixed Income Strategy

    Read full article
  • Equity Outlook: Will lower rates lift all boats in equities?

    Quarterly Outlook

    Equity Outlook: Will lower rates lift all boats in equities?

    Peter Garnry

    Chief Investment Strategist

    After a period of historically high equity index concentration driven by the 'Magnificent Seven' sto...
    Read full article
  • FX Outlook: USD in limbo amid political and policy jitters

    Quarterly Outlook

    FX Outlook: USD in limbo amid political and policy jitters

    Charu Chanana

    Chief Investment Strategist

    As we enter the final quarter of 2024, currency markets are set for heightened turbulence due to US ...
    Read full article
  • Commodity Outlook: Gold and silver continue to shine bright

    Quarterly Outlook

    Commodity Outlook: Gold and silver continue to shine bright

    Ole Hansen

    Head of Commodity Strategy

    Read full article
  • FX: Risk-on currencies to surge against havens

    Quarterly Outlook

    FX: Risk-on currencies to surge against havens

    Charu Chanana

    Chief Investment Strategist

    Explore the outlook for USD, AUD, NZD, and EM carry trades as risk-on currencies are set to outperfo...
    Read full article
  • Equities: Are we blowing bubbles again

    Quarterly Outlook

    Equities: Are we blowing bubbles again

    Peter Garnry

    Chief Investment Strategist

    Explore key trends and opportunities in European equities and electrification theme as market dynami...
    Read full article
  • Macro: Sandcastle economics

    Quarterly Outlook

    Macro: Sandcastle economics

    Peter Garnry

    Chief Investment Strategist

    Explore the "two-lane economy," European equities, energy commodities, and the impact of US fiscal p...
    Read full article
  • Bonds: What to do until inflation stabilises

    Quarterly Outlook

    Bonds: What to do until inflation stabilises

    Althea Spinozzi

    Head of Fixed Income Strategy

    Discover strategies for managing bonds as US and European yields remain rangebound due to uncertain ...
    Read full article
  • Commodities: Energy and grains in focus as metals pause

    Quarterly Outlook

    Commodities: Energy and grains in focus as metals pause

    Ole Hansen

    Head of Commodity Strategy

    Energy and grains to shine as metals pause. Discover key trends and market drivers for commodities i...
    Read full article

Disclaimer

 The Saxo Group entities each provide execution-only service, and access to analysis permitting a person to view and/or use content available on or via the website is not intended to and does not change or expand on this. Such access and use are at all times subject to (i) The Terms of Use; (ii) Full Disclaimer; (iii) The Risk Warning; (iv) the Inspiration Disclaimer and (v) Notices applying to Trade Inspiration, Saxo News & Research and/or its content in addition (where relevant) to the terms governing the use of hyperlinks on the website of a member of the Saxo Group by which access to Saxo News & Research is gained. Such content is therefore provided as no more than information. In particular, no advice is intended to be provided or to be relied on as provided nor endorsed by any Saxo Group entity; nor is it to be construed as solicitation or an incentive provided to subscribe for or sell or purchase any financial instrument. All trading or investments you make must be pursuant to your own unprompted and informed self-directed decision. As such no Saxo Group entity will have or be liable for any losses that you may sustain as a result of any investment decision made in reliance on information which is available on Saxo News & Research or as a result of the use of the Saxo News & Research. Orders given and trades effected are deemed intended to be given or effected for the account of the customer with the Saxo Group entity operating in the jurisdiction in which the customer resides and/or with whom the customer opened and maintains his/her trading account. Saxo News & Research does not contain (and should not be construed as containing) financial, investment, tax or trading advice or advice of any sort offered, recommended or endorsed by Saxo Group and should not be construed as a record of our trading prices, or as an offer, incentive or solicitation for the subscription, sale or purchase in any financial instrument. To the extent that any content is construed as investment research, you must note and accept that the content was not intended to and has not been prepared in accordance with legal requirements designed to promote the independence of investment research and as such, would be considered as a marketing communication under relevant laws.

Trading in financial instruments carries risk, and may not be suitable for you. Past performance is not indicative of future performance. Please read our disclaimers:
Notification on Non-Independent Investment Research (https://www.home.saxo/legal/niird/notification)
Full disclaimer (https://www.home.saxo/en-sg/legal/disclaimer/saxo-disclaimer)

None of the information contained here constitutes an offer to purchase or sell a financial instrument, or to make any investments. Saxo Markets does not take into account your personal investment objectives or financial situation and makes no representation and assumes no liability as to the accuracy or completeness of the information nor for any loss arising from any investment made in reliance of this presentation. Any opinions made are subject to change and may be personal to the author. These may not necessarily reflect the opinion of Saxo Markets or its affiliates.

Saxo Markets
88 Market Street
CapitaSpring #31-01
Singapore 048948

Contact Saxo

Select region

Singapore
Singapore
Products & pricing
Platforms
Accounts & service
General
Other
Legal

Losses can exceed deposits on margin products. Please ensure you understand the risks.

Saxo Capital Markets Pte Ltd ('Saxo Markets') is a company authorised and regulated by the Monetary Authority of Singapore (MAS) [Co. Reg. No.: 200601141M ] and is a wholly owned subsidiary of Saxo Bank A/S, headquartered in Denmark. Please refer to our General Business Terms & Risk Warning to consider whether acquiring or continuing to hold financial products is suitable for you, prior to opening an account and investing in a financial product.

Trading in financial instruments carries various risks, and is not suitable for all investors. Please seek expert advice, and always ensure that you fully understand these risks before trading. Trading in leveraged products such as Margin FX products may result in your losses exceeding your initial deposits. Saxo Markets does not provide financial advice, any information available on this website is ‘general’ in nature and for informational purposes only. Saxo Markets does not take into account an individual’s needs, objectives or financial situation.

The Saxo trading platform has received numerous awards and recognition. For details of these awards and information on awards visit www.home.saxo/en-sg/about-us/awards.

The information or the products and services referred to on this website may be accessed worldwide, however is only intended for distribution to and use by recipients located in countries where such use does not constitute a violation of applicable legislation or regulations. Products and Services offered on this website are not intended for residents of the United States, Malaysia and Japan. Please click here to view our full disclaimer.

This advertisement has not been reviewed by the Monetary Authority of Singapore.

Apple and the Apple logo are trademarks of Apple Inc, registered in the US and other countries and regions. App Store is a service mark of Apple Inc. Google Play and the Google Play logo are trademarks of Google LLC.