Leading Economic Indicators: Predicting Recessions with Data

What Are Leading Indicators?

Leading economic indicators are data series that historically change direction before the overall economy does. They help forecast recessions and expansions.

The Conference Board LEI

Overview

The Leading Economic Index (LEI) combines 10 leading indicators into one composite.

• FRED Series: USSLIND
• IQ Score: 95
• Release: Monthly, third week

The 10 Components

• Average weekly hours (manufacturing)

• Average weekly initial unemployment claims

• New orders (consumer goods)

• ISM new orders index

• New orders (nondefense capital goods)

• Building permits

• S&P 500 stock index

• Leading Credit Index

• Interest rate spread (10-year minus Fed funds)

• Consumer expectations (Michigan)

Interpreting LEI

• Rule of thumb: 3 consecutive monthly declines = recession warning
• YoY change: Negative YoY often precedes recession by 7-12 months
• Depth matters: Deeper declines suggest more severe recessions

Yield Curve Inversion

The Most Famous Predictor

When short-term rates exceed long-term rates, recession typically follows.

Key Spreads

Track Record

The 10Y-3M spread has inverted before every recession since 1970 with:

• Lead time: 6-24 months
• One false positive (1966)
• Current status: Check DataSetIQ

Why It Works

Inversion signals:

• Fed tightening too aggressively
• Markets expect rate cuts ahead
• Banks less willing to lend

Other Leading Indicators

Initial Unemployment Claims

FRED Series: ICSA | IQ Score: 97

• Weekly release (every Thursday)
• Rapid recession signal
• Watch for sustained increases above 250K

ISM Manufacturing PMI

FRED Series: MANEMP | IQ Score: 95

• Below 50 = manufacturing contraction
• New orders component most leading

Building Permits

FRED Series: PERMIT | IQ Score: 94

• Housing leads economy by 6-12 months
• Regional breakdown available

Stock Market

S&P 500 itself is a leading indicator:

• Market peak averages 7 months before recession
• But many false signals

The Recession Prediction Dashboard

High Probability Signals

When these align, recession risk is elevated:

• ✅ LEI declining YoY for 6+ months

• ✅ Yield curve inverted

• ✅ Initial claims trending up

• ✅ ISM below 50 for 2+ months

False Signal Filters

Avoid false positives:

• Payrolls still growing strongly
• Consumer spending resilient
• Credit conditions stable

NBER Recession Dating

The National Bureau of Economic Research officially dates recessions looking at:

• Real GDP
• Real income
• Employment
• Industrial production
• Real sales

Caveat: NBER calls recessions well after they begin (6-12 month lag).

Practical Application

Building Your Recession Dashboard

• Track LEI direction (monthly)

• Monitor yield curve (daily)

• Watch claims (weekly)

• Check PMIs (monthly)

Current Readings

Use DataSetIQ to see all leading indicators in one place with our IQ scores to identify the most reliable series.

Historical Performance

All leading indicators tracked and scored on DataSetIQ for instant recession monitoring.