At the edge of recession? What are the leading indicators saying for the business cycle- magazine Economy and Business


author: Predrag Shapcheski

Economic indicators are statistical macroeconomic variables which assist in analyzing the phase in which the business cycle is. Agreed with the time when they take place, they give indication in which direction the entire economy is moving to. Due to the time specific features of the economic indicators, these can be leading, contemporary with the changes, or delayed. Leading indicators are the ones which change before the macroeconomic changes take place. Those are one of the most important indicators which assist the analysts and investors in their projections for the economy in future. Therefore precisely, the focus on this article is on those indicators.

During 2019 increased interest for discussion and analysis of the change in the business cycle emerged on world level. Economists are giving their opinions and projections throughout various media in view of the next recession. Should we expect it in the next quarters or has it already begun? There from, leading indicators are those which should give clear picture on the present situation in the world economy, and is it facing the expected recession. Leading indicators are numerous and they differ in different regions around the world, but still, some indicators are consistent everywhere. In continuation, considered are the stock market indices, range of interest rates and composite leading indicators as one of the most important.

Stock Market Indices

Monitoring the stock market share indices as are S&P500 (USA) and Euro Stoxx 50 (Europe) is important part in projecting the changes in the business cycle. This indicator is not the most important one, but is an indicator to be analyzed first by the investors, analysts and media. Share prices result largely from the expectations by the investors for the future, i.e. earned profit for the companies. If the assessment for the profit of the companies is correct, the indices may be good indicator for the direction of movement of the business cycle. Due to that, the indices value is the highest before the economy reaches its peak. Starting from 2009 up until today, the index S&P500 is permanently growing. In July this year it reached its peak of 3.083,82 USD. It can be easily considered through this index that the shares are with growing tendency. Until investors are satisfied with the profit from the companies, the index will be in upward line, and it is indicating that the business cycle is not yet on its peak. Still, monitoring of this indicator as a leading one has its failures. At the so called “bull” mood of the market, it is very difficult to predict the exact moment where the economy shall have its peak in the cycle. 

Interest Rate Spread

In view of the yield curve and the interest rates spread, most current topic are the American 10 year yields from treasury bills and interest rate of short-term quarterly bills. Investors have possibility to invest in securities with fixed yields and different maturities, so rather often the required yield is proportional to the undertaken risk for investing. Investing in short-term government bonds is considered as a non-risky instrument and therefore the requested yield is low, while the investing in long-term bills is considered as more risky and analogue to it, the requested yield is higher. In this case, we get yield curve which is growing (curved above).

Still, not always this is a rule and if we analyze the data from the past we shall note that the yield curve is inversed on several occasions. Under such situation, investing in short-term securities (quarterly treasury bills in USA are taken as benchmark) is considered as riskier and because of that the investors require higher yields on short term. Inverse yield curve is a specific leading indicator because it has many year evidences for projecting the change of trend in the business cycle, i.e. starting of a recession period in the economy. In March this year, for first time after 2007, the quarterly yields from the bills were higher than the tenth annual. This is a clear signal that the investors are insecure for the near future and the risk against preserving the short-term bonds is higher than the long-term. In agreement with this indicator, the business cycle gives clear indications that the economy is on its peak and possibilities for recession period are close to us.

Composite Leading Indicators

Composite Leading Indicators was created by OECD in order to give information on early signals for turnovers in the business cycle which present fluctuations in economic activity relative to its long-term potential level. It was created to predict changes in the trend 6 to 9 months before change occurs in the business cycle. Indicators which compose the composite are: supplies and level of stocks, global financial indicators at markets, as are share prices and pools for business sector expectations. The composite offers information on OECD countries, and additionally it is calculated also for some growing economies. It is calculated per month and indicates the trend in economic activity. In agreement with the last report on September 9, the composite continues to signalize stable momentum for development. Separately for the largest members, USA and EU, it continues to anticipate decreasing momentum for development. For the past 12 months, the composite, for the entire OECD zone, notes decrease of 1,24 points or in compliance with the latest data, it has value of 99,00 whereby the amount of 100,00 is long-term potential level, while 99,00 is economic activity in the zone.

Taking into consideration the above stated indicators, it is clear that these give mixed signals for the direction in which the market is moving at the moment. On one hand, world stock markets still show “bull” mood of the market, which is longest in the history and is lasting from March 2009. On the other, we have clear recessive indicator of the interest rates spread, where for the first time after 2007it was negative. Additionally, we receive data from OECD for decreased momentum for development and values under long-term potential level of the economic activity. Mixed signals are sufficient reason for concern, but are not definitive evidence for strong contraction of the economy or recession.

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