Recession Watch Update: Four Leading Economic Indicators Signal a Stronger Economy Ahead

Even though we have already experienced the longest expansion on record, the latest data suggest the possibility of a resurging level of business activity as the economy emerges from its third post 2009 slowdown. As a follow-up to our July article, Recovery or Recession? Ask the Stock Market Stupid!, here’s our latest business cycle update.

Contrary Opinion and the Pring Turner Approach

It’s well-known in investment circles, that when a recession begins, most economists are still offering rosy forecasts. That does not appear to be the case at present. Instead, what we have recently experienced, is rampant talk of recession with concerns ranging from inverted yield curves, weak ISM numbers, slower job growth and so forth. From a contrarian aspect that wide level of concern is actually constructive! The late contrarian Humphrey Neil once reminded us that crowds, tend to extrapolate recent trends because they feel more comfortable with the status quo than going out on a limb and taking a forecasting risk.

At Pring Turner we take advantage of the reality that the business cycle is nothing more or less than a repetitive sequence of chronological events. Consequently, it is continually transitioning through a progression of seasons, each of which demonstrably favors specific asset classes and stock market sectors. This approach, which we have used as the foundation of our investment management practice and are continuously honing, puts us in a better position to identify the current phase or investment season and allocate assets accordingly. Why load up on stocks just prior to a recession and why own a slug of bonds in the inflationary season?

An Examination of Some Reliable Forward-Looking Indicators

So where is the economy likely to take us now? If we want some guidance as to which fork in the track a train will take, it’s no good looking at the caboose, as that’s a lagging indicator. Rather, it’s the engine that should command our attention, because it’s a leading one. By the same token, if we want to figure out where the economy is headed, coincident indicators, such as nonfarm payrolls or GDP, should be downplayed in favor to those that turn ahead of the economy.

Specifically, we are going to consider four reliable indicators that have consistently led the economy into and out of recession over the last six decades or so. They are, the Chemical Activity Barometer (CAB), housing starts, the Pring Turner Leading Economic Indicator and, what we call, the Equity Kicker. Let’s start off with the CAB, as this series can best explain business cycle activity during the post-2009 recovery. It is a composite leading economic indicator published by the American Chemistry Council and has foreshadowed every recession since the early twentieth century. The lead times range between 2 and 14 months, with an average of 8 months. Its reliance of data from the chemical supply chain makes it unique, which means that it can act as a check on other LEI’s. The red highlights in Chart 1 represent recessions, whereas beige reflects our classification of growth slowdowns. Fluctuations in the price oscillator, in the bottom window, show us that there have been three slowdowns and two recoveries since the financial crisis of 2008-9.