In this activity, you will explore leading economic indicators and their relationship to recessions.
Understanding Leading Economic Indicators
Leading economic indicators are statistics that provide early signals of where the economy is heading. They are called "leading" because they tend to shift direction before the economy as a whole changes. In this activity, we'll explore several key leading indicators:
10Y-2Y Yield Spread: The difference between 10-year and 2-year Treasury yields. An inverted yield curve (negative spread) often precedes recessions.
ISM New Orders: A measure of new orders in manufacturing. Values below 50 indicate contraction.
Building Permits: A measure of future construction activity. Declining permits may signal economic slowdown.
Consumer Confidence: Measures consumers' optimism about the economy. Lower confidence often precedes reduced spending.
PMI (Purchasing Managers Index): A composite index of manufacturing activity. Values below 50 indicate contraction.
Initial Unemployment Claims: Weekly new jobless claims. Rising claims often signal labor market weakness.
S&P 500: A broad measure of stock market performance. Stock prices often reflect future economic expectations.
CLI (Composite Leading Indicator): An OECD index combining multiple leading indicators.
Video Overview: Leading Economic Indicators
Here is a very recent video (April 30th) discussing the role of building permits in predicting economic downturns:
Next steps:
Explore the individual indicators and their historical patterns in the next tab.
Analyze how each indicator behaves before and during recessions.
Finally, create your own leading index by combining these indicators.
