What’s the best way to predict where the economy is headed?
What’s the best way to predict where the economy is headed?
The Conference Board is yet again saying that its Leading Economic Index, or LEI, released Thursday indicates a recession is coming — a recession we keep hearing about but that has not materialized for many months.
Historically, the LEI has been a strong predictor of recessions. But it’s not foolproof — especially in today’s economy.
Kind of like athlete rankings, the Leading Economic Index crunches 10 different performance stats that hint at future economic activity — things like consumer expectations, new unemployment applications and new building permits.
“You would know if people acquired permits, then future economic activity in construction, right, would be coming,” said Tatevik Sekhposyan, an economics professor at Texas A&M University.
These components were chosen because “when you kind of like throw them against the wall, they tend to start to dip before we officially enter a recession,” according to Dietrich Vollrath, the chair of the University of Houston economics department.
But these measures aren’t perfect, he cautioned. “It’s just the 10 things that looked like they were pretty good at predicting the economy in the past, right? We don’t update the leading indicators every day.”
Especially after a once-in-a-lifetime event like a pandemic, Vollrath said the LEI may not be not as predictive as it once was.
Ed Yardeni, president at his firm Yardeni Research, calls the index “half right,” noting that “it’s overly biased towards the goods and doesn’t give services enough due respect, if you will.”
Another skeptic? Ayse Imrohoroglu, a professor at the University of Southern California’s Marshall School of Business, who said there’s no looming recession.
“And we still continue to have very low unemployment rate,” she said.
While the components of LEI may be useful, Imrohoroglu added that the index is losing some of its predictive power.
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