Cause for Concern? Coincident-Lagging Economic Ratio is at a 41-Year Low
The Conference Board’s Coincident-Lagging Ratio has done a pretty good job of identifying recessions since 1958. That is, until now. In each of the last eight recessions, the Coincident-Lagging Ratio bottomed near the end of the recession and was declining throughout the recession. It has been a pretty reliable indicator giving only three false signals, excluding the recent data, in 1967, 1986, and 1996. As reminder, there are four coincident components and seven lagging components. They are listed below.
The general economic thinking is that near the end of an economic cycle lagging indicators are growing faster than coincident indicators, which leads to a decline in the ratio. As the first chart below shows, this ratio has clearly been declining since 2011, however, the US has been able to avoid a recession. While looking at just the ratio clearly tells you something what is going on in the economy, there seems to be a better way of looking at this ratio that may help explain why the US hasn’t been in a recession.