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There’s Still One Indicator That’s Warning of Recession: Deutsche Bank

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The U.S. unemployment rate is below 5%, manufacturing is picking up, and jobless claims are falling, but Deutsche Bank AG says there’s still reason to worry about a recession. 

According to the firm’s Chief U.S. Economist Joseph LaVorgna, looking at the index of leading economic indicators — a measure by the Conference Board that includes economic indicators believed to change before the broader business cycle — brings cause for concern. 

“While consumer spending was relatively sturdy in the second quarter and nonfarm payroll growth rebounded solidly last month, the downward trend in the growth rate of the LEI indicates that near-term risks to growth remain to the downside,” he writes. 

Here’s a chart from the note, where recessions are shaded in grey. “As the chart below illustrates, in the past two business cycles, an outright year-over-year decline in the LEI after a prolonged period of growth has presaged recession,” LaVorgna says. 

Source: Bloomberg

However, this index is not without its critics. “What is the point of looking at the LEI when all of the components that go into it are available before its release date,” says Neil Dutta, Head of U.S. Economics at Renaissance Macro Research LLC. “[T]he LEI is old news by the time it is released…I’d argue it is a meaningless indicator because we already know what stocks, the yield curve, consumer confidence, jobless claims, ISM, did.”

LaVorgna acknowledged this in his note, but said that putting all of the components together can prove useful. “Although market participants tend to give the index of leading economic indicators (LEI) short shrift because most of the subcomponents are already known at the time of its release, the series tends to capture turning points in the economy.”

When looking at other indicators that comprise various data points, one can see a much different picture. For example, the Citi Economic Surprise Index, which measures what economic data is relative to market anticipations, has continued to move higher after a lackluster start to the year. A reading above zero means that data has been better than the market expected, and below zero means it wasn’t as good as the market thought it would be. 

Source: Bloomberg

Another reason to be less than certain about where the economy is heading.