What do leading indicators say about recession risk this year?

Recession risk remains an area of focus for investors, as uncertainty around the Fed’s ability to bring inflation under control without driving the economy into recession remains a question.

So how significant is that risk today? While there are several economic data points that have recently surprised to the upside, other gauges continue to point to an elevated probability of recession. One example is the Conference Board’s Leading Economic Index, a data series that compiles 10 different indicators that have historically provided meaningful insight into the direction of future economic growth. Historically, a contraction of more than 3.2% in the index over a six-month period has typically signaled the onset of a recession. Today, the index has contracted by nearly 4% over the past six months, a drop that has rarely occurred in the absence of a recession. One key component — the treasury yield curve — has been inverted since last July. Inversions typically lead a business cycle contraction by six to 18 months. That development suggests that the probability of recession by the end of this year is quite high.

Could this time be different? It’s possible, though it would mean several historically reliable recession indicators are sending false signals. Yet, as we discuss in our accompanying piece, strong job creation, a reacceleration in the service sector, and solid consumer spending growth in January indicate that consumers are showing their resilience and the economy appears to have come out of the gate strong last month.

It’s possible that this Fed may succeed where their predecessors didn’t, delivering a soft landing. It could also mean that a recession is still coming: a risk that’s deferred perhaps but not diminished.