US leading indicators signal recession

For various reasons, I haven't calculated my US cyclical indices for a year or more.   But I've finally updated my US data banks and psyched myself up to do the calculations, so, here goes.

The chart below shows the year-on-year percentage change in my US coinciding and my US leading indices.  They are calculated from many underlying time series and are designed to remove some of the noise caused by the plethora of indicators which move in different directions each month, and that way to give clarity about the direction of the economy.

I have plotted my leading index with a 12-month lag.  This gives us an implicit forecast of the economy's direction over the next 12 months.  Observe how covid screwed up the lags, which is logical, because the covid crash and the recovery from covid were caused by exogenous influences, not by movements in the economy itself.

Note how the percentage change in my leading index is falling fast, suggesting that over the next 6-12 months the economy will be weak, or in recession.

The chart below compares my US coinciding index with my US diffusion index.  A diffusion index measures what percentage of a universe of monitored time series is rising.  In this case, the universe is 57 different time series, almost exclusively monthly.  When all are rising, the economy is strong.  When all are falling, it's in deep recession.  It's been smoothed using a 12-month centred moving average to iron out the monthly ebbs and flows.

It leads the cycle by about 5 months.  The unsmoothed diffusion index ticked up in November, but (a) that's based only on those data which were available, and (b) small blips in diffusion indices can be revised away as more data become available, and (c) it's just one month.  However, if this is the low for the diffusion index, it nevertheless indicates that, for at least the next 5 or 6 months, the US economy will be slowing.  

None of these indices gives pin-point timing or extent of the swings in the business cycle.  However, they do give strong rough indications of what's happening.  

My guess is that the US economy will be weak or even declining until the middle of next year.   But as I have said before, this is the first recession in my long professional experience caused by the extreme incompetence of the party and politicians in office, and by damaging policies, rather than by the strong ebbs and flows of the economy, so who knows?

US manufacturing stagnates

As usual, the line to watch is the thick green one, which should have less variability than either individual index. (Both indices are extreme-adjusted, but that mostly just reduces the down spike caused by covid in 2020.)

Right now, the manufacturing PMI index is rising while the manufacturing ISM index is falling.  This divergence in direction hasn't happened before. In 2017/18, a gap between the levels of these two indices did open up, but their direction was roughly the same.   But since late 2025, the PMI has been rising, while the ISM has been falling.

Which is "correct"?   We won't know for another few months.  What we do know is that the average of the two is flat, and only just above the 50% "recession line", in other words, stagnating.  If you feel compelled to go with the "better" index, that's prolly the ISM*, which goes back to 1947, when it was called the NAPM* index.  It has correlated well with every major and most minor business cycles since then.  And it looks as if it's falling.

*NAPM = National Association of Purchasing Managers.  ISM = Institute of Supply Management.  I suppose they thought that sounded a bit grander.

US econ still drifting

 The PMI release for August suggested that the US economy was, strangely, picking up.   Of course, that is still possible.  Responding to every zig and zag of monthly data can be a mistake.  And normally, that's not necessary: the big cycles in the economy are caused by shifts in monetary and fiscal policy, and these take months, sometimes many months, to take effect.  We have plenty of time to see whether each little blip in the data is in fact important.  

However, Trump's trade wars and the deportation of millions from the labour force is massively disruptive.  It has short-term as well and long-term consequences.  And by their nature, the short-term consequences should start showing up in recent data.   Now, the theme seemed to be that up to the end of last year, there was a nascent economic recovery, in the USA, and globally.  All the indicators were picking up.  Then from February onwards, US indicators plunged, and the S&P Global PMI suggested that that plunge has ended and growth is once again accelerating.  The latest ISM (Institute of Supply Management)  manufacturing survey rose only a little in August.   In fact, since January, the two time series have been moving in quiet different directions.

The chart below shows the extreme-adjusted S&P Global and ISM manufacturing survey results, and their average.  Because an average of two times series which are (statistically) independent has a lower standard deviation (lower error term) than either separately, the line to focus on in the chart below is the thick green one.

US ISM & PMI pick up

 As usual, the line to watch is the thick green line in the chart.  This is the average of the extreme-adjusted manufacturing ISM and PMI surveys.  Since these surveys are (statistically) independent, the average will have a lower error term than either individually.

The ISM services PMI is out later tonight (my time zone), so I'll report on that tomorrow.

Far from a boom, what these data show is that the economy is certainly not sliding deeper into recession; on the contrary, it is prolly starting to pick up.  Trump will get the credit, though economies respond with a lag to policy changes, so the rise is due to Biden-era policies.   

US employment data remain strong

There are random fluctuations in any time series, which can cloud one's perception of the current status quo.   The old "signal-to-noise" problem.  

It seems to me, though, that the change in employment is accelerating, while the change in unemployment (inverted because it is inversely related to economic activity) is still improving, despite February's jump in the unemployment rate (which, remember, is shown as a fall because it's plotted inverted).  

Overtime hours (very sensitive to the cycle) are rising, in line with the QCI (my monthly GDP proxy).  

Latest datum for each time series is February, except for the QCI which is January.

My conclusion: despite the fall in the ISM in February, the other "early indicators"  (including the PMI) all point up. 

 

Pointing towards a US recession

 If you look just at surveys such as the PMI or ISM, the US economy looks as if it has stopped falling and might even be about to turn up.   There is one indicator, however, which points towards recession, and that is the unemployment rate.   Now, the unemployment rate is a lagging indicator, inversely related to the economic cycle.  So, on the face of it, not a particularly useful guide to the current state of the economy.  But .... its change over three or six months is a coinciding indicator which tells you what's happening to the economy right now.

The chart below shows the six-month change in the US unemployment rate, plotted inversely.  It is consistent with deepening recession, after the "blip" earlier this year.  You can see the business cycles of the past clearly outlined:  the double-dip, deep recessions of 1980 to 1984; the 1990 recession; the 2001/02 recession; the GFC in 2009; the covid crash in 2020, with its rebound in 2021, as well as the peak in late 2021/early 2022 as the economy responded to zero interest rates and massive fiscal stimulus.   [On a personal note, I lived through them all, as I have been in investments/economics since 1975, and that is how long I have been forecasting the US and world economies.]

Some of the rise in the unemployment rate is due to strikes in the latest month.  But only some.  This indicator points unambiguously to recession.  Which is very interesting indeed.