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Keep an Eye on these Recession Indicators

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In order to assess the odds of an imminent recession, these three indicators are key to watch:

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Recession Indicators to Keep an Eye On

Chicago Fed National Activity Index (or CFNAI)

While less well known than the more popular Conference Board Index of Leading Indicators, the CFNAI is the strongest leading indicator I’ve found. Historically, looking at data accessible via Bloomberg, the monthly CFNAI has explained roughly 40 percent of the variation in the next quarter’s gross domestic product (or GDP), and its forecasting significance extends out as far as six months. While the index fell sharply in August, it’s still at a level consistent with an expansion, albeit a slow one. However, should the indicator remain consistently in negative territory for the remainder of the year, this would be consistent with the pattern leading into previous recessions.

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Market Realist – The CFNAI index suggests that the economy’s slowing down.

The CFNAI is a weighted average of 85 national economic activity monthly indicators. In contrast to backward-looking statistics like GDP (gross domestic product), it’s a forward-looking metric that indicates the likely path the economy will take in the next few months.

The index slipped to -0.41 in August from a seven-month high of 0.51 in July. While this is a huge slide, the index doesn’t suggest that a recession is coming. Prior to the last recession, leading indicators had been negative for nearly two years. The CFNAI had been consistently in negative territory for most of 2007 and all of 2008. A further decline in the index, though, would signal that the economy could be heading toward a recession.

While a slew of weak macro data means that the Fed could further delay the rate hike, equities have performed well on continued easy money. The S&P 500 index (IVV)(VOO) was up 5.7% for October as of October 19. However, weak earnings growth and rich valuations represent headwinds for US equities. Meanwhile, Treasury (TLH)(SHY) yields are heading lower. The ten-year Treasury is offering slightly over 2.0%. Keep reading to find out which other indicators you need to keep an eye on.

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