The RecessionAlert weekly leading economic index (WLEI) is a composite for the U.S economy that draws from over 20 time-series and groups them into the following six broad categories which are then used to construct an equally weighted average.
- Corporate Bond Market Composite
- Treasury Bond Market Composite
- Stock Market Composite
- Labor Market Composite
- Credit Market Composite
- Mortgage Market
Here is an excerpt from the description:
As with all weekly indices though, the data is far more volatile than monthly or quarterly indicators and the WLEI components are therefore subject to more false positives (calling recession when one does not occur.). The WLEI is heavily weighed toward financial market data, but the obvious advantage of this is that data revisions are minor and isolated to the Labor Market Composite and small portions of the Credit Market Composite.
RecessionAlert WLEI
The chart below uses data going back to 1973 and includes recession starts. It is easy to see that a recession (gray bars) is closely aligned with the RecessionAlert WLEI dropping into negative territory. Note however, there have been a few instances where the WLEI has contracted without a recession being called. First, during the back half of 1984 and again, more recently, from May 2002 through June 2023 (56 weeks). With that said, it is a fair assessment to say that the WLEI has been a reliable indicator for recession calls.
As of November 29, the index was at 32.851, up 1.819 from the previous week, with 5 of the 6 components in expansion territory. We have been in positive territory for over a year now, dating back to the week of September 1st, 2023.
The index's average at the start of the seven recessions shown above is -11.512 with a range of -43.772 to 40.720. We have been above the average recession start level since April 2023.
The value of the WLEI at the start of six recessions before the COVID-pandemic were negative, so its safe to say the 2020 recession could be considered an outlier. If we take out that outlier value, then the average drops to -20.218, a level we hovered around at the end of 2022 and for a brief time in March but have been above since March 2023.
For another perspective, let's look at the comparison with GDP growth since 1970. Again we can see that negative GDP and slow economic growth tend to be matched by the WLEI.
RecessionAlert WLEI: A Different Perspective
As stated earlier, the RecessionAlert WLEI is a composite for the U.S economy that draws from over 20 time-series and groups them into six broad categories. What happens to the index when we exclude one of the six components?
The next chart shows the WLEI however all stock market components are excluded from the index's calculation. The latest reading is at 19.718.
How does this compare to the headline indicator? In the chart below, we see that the stock market exclusion typically pulls the headline WLEI down. In the 4.5 years that we have data on both series, the WLEI stock exclusion series has been below the headline WLEI 78% of the time. It should come as no surprise that during the bear market of 2022 is when the stock market exclusion series was higher than the headline series.
Here I've zoomed into the turn of the century and added in ECRI's WLI for comparison. As you can see, the ECRI indicator has repeatedly shown conspicuous contractions between recessions, enough to make an erroneous recession call while the WLEI did not trigger such a call. Both indicators generally move in the same direction, but the WLEI less volatile.
Note: We have discontinued our weekly update for the ECRI Weekly Leading Index.
Note: My charts have a two-week lag and are published weekly on Mondays.
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