Misleading Signals from Economic Indicators

I was half in mind
I was half in need
And as the rain came down
I dropped to my knees and prayed
--Style Council

John Hussman offers one of the more thoughtful analyses of leading economic indicators (LEIs) that you're likely to come across. Based on his data, he's pessimistic that recent anecdotal evidence (i.e., downticks in unemployment, upticks in purchasing managers index) are sounding 'all clears' with respect to recession chances.

In fact, Dr J's assessment suggests the opposite: recession appears likely within the next 6 months.

One point I found particularly interesting is that some factors used in LEI analyses tend to 'look good' right up to commencement of a recession. For instance, Dr J notes (see below graph) that payroll growth tends to be positive in 80% of the months where recessions begin! Moreover, payroll growth in the 'recession month' tends to be higher, on average, than the three preceding months.

Obviously, unadjusted payroll growth is not a good standalone predictor of recesssions. Indeed, from the above graph, payroll growth appears to be a lagging indicator of recessions.

Bottom line: be careful what you absorb from the popular press concerning economic indicators and recession potential.