A contraction of 3% or more in the LEI’s six-month annualized rate-of-change has always been associated with a recession, with an average lead time of four months. Using that guideline, the most recent recession warning was triggered in June 2022, and the lead time is now approaching the longest ever recorded (16 months in 2006-07). If today’s lead time matches the 2006-07 experience, the business-cycle peak will occur in October.
The hostile monetary backdrop makes recent stock market exuberance even more irrational than in early 2021. Yet, this is the middle of a seasonal window that historically boasts an elevated level of craziness: It is the year preceding a presidential election—a time when monetary and fiscal stimulus are ramped up.
The LEI’s 3.6% six-month annualized loss through September 2006 was the largest decline not followed almost immediately by a recession. This year, the LEI contracted by 3.7% over the six months through June—if a recession is avoided in the current experience, it would be the most misleading signal in the history of the LEI as currently constructed.