"The Leading Economic Index provides an early indication of significant turning points in the business cycle and where the economy is heading in the near term."
The idea is that the index is greater than the sum of its parts, bringing together 10 different components – including data around unemployment claims, consumer spending, housing starts, equity prices, interest rates, the money supply, and more – to offer insights that are clearer and more convincing than any individual component.
With the LEI, the so-called 3D’s rule is what to watch: the duration, depth, and diffusion of a downward movement in the LEI. Duration is how long-lasting the decline is, depth is how large it is, and diffusion measures how widespread the impact is across the 10 components the LEI tracks.
Since 1960, each time the LEI dropped below -4.0, the economy was in recession. The current reading from April 30, 2023 is -8.0. There are additional ways to interpret the LEI as well. When the LEI drops more than 4.2% over the course of six months, recession is here. As of May 2023, the LEI is currently down 4.4% since last October, meaning we are already in recession. The drop off is accelerating, too, falling further than the 3.8% drop between April and October 2022. This exact scenario has accurately predicted recessions in 2020, 2008, 2001 and more.
"The LEI for the US declined for the thirteenth consecutive month in April, signaling a worsening economic outlook,” said Justyna Zabinska-La Monica, Senior Manager, Business Cycle Indicators, at The Conference Board. “Importantly, the LEI continues to warn of an economic downturn this year. The Conference Board forecasts a contraction of economic activity starting in Q2 leading to a mild recession by mid-2023.”
Whether the U.S. economy is officially in recession or not, the Federal Reserve’s efforts to tighten credit and slow the pace of the economy is clearly working.