Think Tank Points to U.S. Growth Slowing

The LEI has recently stagnated while the coincident and lagging indices have continued to advance, causing the ratio to fall slightly. This suggests that U.S. economic growth is about to slow to a pace of around 1.5%-2.0% while the unemployment rate might either edge lower or stabilize at current levels.

If you’re worried about a recession, the simple message is: don’t sweat it. Usually, the Lead/Lag ratio has to register about a 5% year-on-year decline or Lead/Coincident ratio needs to register about a 4.0% year-on-year decline before a recession becomes likely. That hasn’t happened yet but since the indicators’ last reading (March 2019), there are signs that the ratios are about to decline further. Among the various leading indicators in the ratio’s numerator (Figure 5), ISM New Orders slowed sharply in April (51.7 versus 57.1 in March). By contrast, non-farm payrolls, a coincident indicator in the denominator of the ratio, continued to advance strongly.  Moreover, the yield curve remains relatively flat and this will detract from the growth of the LEI relative to the coincident and lagging indicators, putting downward pressure on the ratios going forward.

As such, while there are no imminent signs yet of a downturn, keep an eye on the LEI and its ratio to the coincident and lagging indicators to see which way things are headed. If the LEI/coincident and LEI/lagging indicators go into free fall, as they did during the summer of 2007, it might be time to batten down the hatches. For the moment, however, they simply suggest a slowdown in GDP growth to close to its post-crisis average pace.