Recession Indicators, Pt 1 : The Indicator from Planet Money Are we heading into a recession? The Conference Board's Leading Indicator has ten ways to tell.
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Recession Indicators, Pt 1

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Recession Indicators, Pt 1

Recession Indicators, Pt 1

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STACEY VANEK SMITH, HOST:

So Cardiff, there is a question that I have been getting asked a lot lately from my friends and from people when I meet them and tell them what I do, and that is this. Are we about to go into a recession?

CARDIFF GARCIA, HOST:

Whoa. What weekend social gatherings are you attending?

VANEK SMITH: You know, very dark ones. (Laughter) And I - the thing is, though, I never know how to answer this. And I usually just say something like, well, it's hard to tell, you never know, things like that.

GARCIA: Those are true, by the way. You don't.

VANEK SMITH: I know. That is true. That is true. But still, I mean, Cardiff, we host a show called THE INDICATOR. And so I feel like I need a better answer, probably involving some economic indicators, and not just, you know, some run-of-the-mill indicator like the stock market, but like - I don't know - some kind of, like, semi-secret recession indicator (laughter).

GARCIA: Oh, upping the mystery factor. I like it.

VANEK SMITH: This is THE INDICATOR FROM PLANET MONEY. I'm Stacey Vanek Smith.

GARCIA: And I'm Cardiff Garcia. Today on the show, are we about to go into a recession? We try to help Stacey answer that question by looking at the indicators.

(SOUNDBITE OF MUSIC)

GARCIA: OK. So let's cut to the chase. Are we heading into a recession?

ATAMAN OZYILDIRIM: That's a million-dollar question.

VANEK SMITH: I feel like it's more than a million dollars.

(LAUGHTER)

GARCIA: Ataman Ozyildirim is the director of economic research at the Conference Board. That's a nonprofit that does a lot of economic research.

OZYILDIRIM: Especially those turning points when the economy moves from expansion to contraction are really, really hard to maybe impossible to predict.

VANEK SMITH: Why is that? It seems like it should be doable.

OZYILDIRIM: The economy is a very complex animal. There are a lot of different factors playing on it. And the future is not written, so those factors could change and change how the future gets written.

GARCIA: We wanted to talk to Ataman because the Conference Board itself publishes one of the most watched and referenced recession indicators around. It's called the Leading Economic Index.

VANEK SMITH: The Conference Board has been publishing the index every month since the mid-1990s. And the index has predicted the two recessions that we've had since then.

GARCIA: And a natural question to follow up with is has it had any false signals. In other words, has it predicted recessions that then did not happen? The answer is also yes because this stuff is hard. There's no perfect indicator, including this one. Caveat emptor.

VANEK SMITH: Always.

OZYILDIRIM: December 2007 was the beginning of the previous recession, and the Leading Index started going sideways and gradually declining in the middle of 2006.

VANEK SMITH: Do you remember seeing the - this index start to move like that?

OZYILDIRIM: It's not a memory that I like to recall very much. But I remember we did start to see something changing in the air. It started doing kind of this sideways movement. And those are the periods that you really have to watch out for because the signals start to get more muddled and more mixed.

VANEK SMITH: Ataman says he remembers the office just started to get really quiet. And the Leading Economic Index kept ticking down month after month. And about a year and a half after the index started dropping consistently, the U.S. economy went into recession.

GARCIA: And since then, the Leading Economic Index has evolved. Ataman has had a hand in shaping that evolution. He says part of the reason that people like the index is that it does evolve and that it's very transparent in how it evolves.

VANEK SMITH: What is - I mean, what's in it (laughter)?

OZYILDIRIM: Well, the Leading Economic Index for the United States has 10 components. And those components come from various aspects of economic activity.

VANEK SMITH: It's like an uber-indicator comprised of 10 mini-indicators that are all weighed equally. The first two indicators, numbers one and two, have to do with employment. And the first is average weekly hours worked in manufacturing.

And this is basically a window into the manufacturing sector of the economy because when manufacturing companies are having workers put in more hours, it often means they're producing more stuff. And they may even be hiring in the near future. When companies are having people work fewer hours, it's often because they're trying to save money and could even foreshadow some layoffs.

GARCIA: And the second employment indicator is jobless claims, people filing for unemployment benefits.

VANEK SMITH: That seems like a really good one. Number three?

OZYILDIRIM: It is. And then we come to the new orders-related series.

GARCIA: So the next three indicators - those are indicators three, four and five - these have to do with orders. So what consumers are ordering from companies, things like computers and washing machines, and also what companies are ordering, like new machines and tools to make their products, and finally, what supplies businesses are ordering.

VANEK SMITH: Like Post-it notes and forklifts?

OZYILDIRIM: Exactly (laughter).

GARCIA: If a company gets a lot of new orders from consumers or from other businesses, then it might have to hire more people and even expand its operations. If, on the other hand, orders are falling, then companies might have to start laying people off and selling their property.

VANEK SMITH: Indicator number six has to do with the housing market - building permits for residential construction. This is a really popular indicator for recession watchers because if you want to build a house, you have to get a permit. And that permit will basically end up translating into a bunch of construction jobs and money spent on everything from concrete to washing machines to carpenters. A new house generates a lot of money in the economy.

GARCIA: The next three, indicators seven, eight, nine, all have do with financial markets. So number seven just looks at the good, old-fashioned stock market, the S&P 500, and how it has performed in a given month. And also, number eight, there's something called the Leading Credit Index, which basically takes the temperature of the financial sector, of credit markets.

VANEK SMITH: And then number nine is something weird having to do with Treasury bonds.

GARCIA: Oh, yeah. I know what's coming.

VANEK SMITH: I think they just felt sorry for this indicator, so they included it (laughter).

GARCIA: Whoa, whoa, whoa. We're talking about the yield curve. Let's say it with reverence.

VANEK SMITH: We're talking about the yield curve. Yes.

OZYILDIRIM: Number nine is the interest rate spread, sometimes called the yield spread. And...

VANEK SMITH: This is the yield curve? My co-host loves the yield curve.

OZYILDIRIM: OK. Great. It's very popular with some people.

GARCIA: Did I catch a mild derogatory tone with which he said some people...

VANEK SMITH: (Laughter).

GARCIA: ...Find it popular?

VANEK SMITH: No. Actually, Ataman told me he's a big fan of the yield curve and that it was important to him that it had its own spot in the 10 indicators. And so there you go. You're validated.

GARCIA: Excellent.

VANEK SMITH: Yield curve. Number 10 - this is my personal favorite - feelings.

GARCIA: Feelings?

VANEK SMITH: Cardiff, nothing more than feelings. It's actually a combination of numbers from the Consumer Sentiment Report and the Consumer Confidence Report. And basically, these numbers are meant to be a measure of how optimistic or pessimistic people are feeling about the U.S. economy.

GARCIA: So that's it. That's all 10 indicators that make up the Leading Economic Index. But of course, we have to ask the big question. What is it actually telling us about whether we're going to go into a recession?

OZYILDIRIM: Across the 10 indicators, eight of them have been rising over the last six months. And that's pretty solidly in expansionary territory.

VANEK SMITH: Wait. What are the other two?

Ataman tells me there's been a slowdown in the average number of manufacturing hours work. That's been declining a little bit. And the second downtick has happened in new home permits. Those have been slowing down too.

GARCIA: Yeah. But still, overall, Leading Economic Index is showing a pretty strong economy.

VANEK SMITH: That's true.

GARCIA: Yeah. Ataman says there has not even been a hint of the strange feeling that he started to get watching these indicators back in 2007.

VANEK SMITH: And you just - you said you just kind of started to get a feeling?

OZYILDIRIM: There is a bit of an art and science to interpret the leading indicators. And while it was difficult to interpret, you do kind of start to get a sense that something is changing.

VANEK SMITH: What was it like around here during that time?

OZYILDIRIM: Well, I think I remember that we did have a lot more discussion and debating. So our forecast meetings tended to get longer and longer as we kept going.

GARCIA: Yeah. Long meetings at economic think tanks - who knows? Maybe that's an indicator all of its own.

VANEK SMITH: Long meetings.

GARCIA: Yeah.

VANEK SMITH: (Laughter) The long meetings indicator.

GARCIA: Exactly. Happily, Ataman says that the meetings at the Conference Board, though, are still pretty short for now. So that's it. Lots of things to say the next time somebody asks you about a recession. You now have 10 indicators to point to, and eight of them are looking pretty good.

VANEK SMITH: That's true. Ten indicators is a lot of indicators. But I don't know, Cardiff. I sort of feel like, you know, here at the show, there is a part of the economy that we have kind of focused on, that we've looked at very carefully. And I sort of feel like I want to look in there too. That would be the job market. That is the part of the economy where people really feel the economic ups and downs.

GARCIA: So on Monday, we are going to check out a few indicators from the labor market as well.

VANEK SMITH: Cardiff, I'm going to be so in demand at parties from now on.

GARCIA: I think you already are.

VANEK SMITH: (Laughter) Oh, that's so nice.

GARCIA: But this'll really up it.

VANEK SMITH: Yes. Yes. Can you - yeah, I'll just stand by the punch bowl.

(SOUNDBITE OF MUSIC)

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