As we enter the second month of the fourth quarter, the economy is in relatively uncharted territory.
Witness the Leading Economic Index (LEI), which tracks ten data points that tend to change before the overall economy does. Economists monitor the LEI because it includes data that can provide insight into future economic activity, such as unemployment claims, building permits, and manufacturing hours worked. A rising LEI signals improving economic conditions, while a declining LEI suggests worsening conditions.
In early 2020, the LEI declined as the pandemic led to economic shutdowns. Following a brief recession, the index rebounded later in 2020 and into 2021, driven by government stimulus, the reopening of the economy, and low interest rates. The LEI peaked in November 2021, but it has declined steadily over the past few years and now sits at the lowest level since 2016.
Historically, when the LEI declines for several consecutive months, the economy is often entering or is already in a recession. For example, in 1979, the LEI declined for eight consecutive months leading up to the recession. In subsequent recessions, the number of consecutive monthly declines was three months ahead of the 1981 recession, four in 1990 and six in 2001. The longest streak of declines before a recession started was ten months in 2007. The latest data shows the LEI has declined for 30 consecutive months, which surpasses all prior levels. This trend is concerning because it is generally associated with recessions.
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S&P 500 Index: The S&P 500 Index consists of 500 stocks chosen for market size, liquidity, and industry group representation. It is a market value weighted index with each stock’s weight in the Index proportionate to its market value.
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