Coincident Economic Indicators: History Suggests Recession is Close

The Philadelphia Fed's coincident economic activity index suggests the economy is close to recession.

The Coincident Economic Activity Index is produced monthly by the Philadelphia Fed.

The indexes are released a few days after the Bureau of Labor Statistics (BLS) releases the employment data for the states.

The coincident indexes combine four state-level indicators to summarize current economic conditions in a single statistic. The four state-level variables in each coincident index are nonfarm payroll employment, average hours worked in manufacturing by production workers, the unemployment rate, and wage and salary disbursements deflated by the consumer price index (U.S. city average). The trend for each state’s index is set to the trend of its gross domestic product (GDP), so long-term growth in the state’s index matches long-term growth in its GDP.

A dynamic single-factor model is used to create the state indexes. James Stock and Mark Watson developed the basic model for constructing a coincident index for the U.S. Theodore Crone and Alan Clayton-Matthews adapted the basic model for the states. The method involves a system of five major equations: one equation for each input variable and one equation for an underlying (latent) factor that is reflected in each of the indicator (input) variables. The underlying factor represents the state coincident index. The model and the input variables are consistent across the 50 states, so the state indexes are comparable to one another.

On a year-over-year basis, recessions have started when the year-over-year CEI was around 2.5 percent.

Leading Economic Indicators

The Philadelphia Fed also produces leading indexes for each of the 50 states.

The data does not go back as far as the CEI data.

LEI Data Sources

  • Delivery times from the ISM Manufacturing Survey can be obtained from the Institute for Supply Management. External Link
  • Housing permits can be obtained from the U.S. Census Bureau. External Link
  • Initial unemployment insurance claims can be obtained from the Department of Labor. External Link
  • Interest rates for the 10-year Treasury bond and the 3-month Treasury bill can be obtained from the Board of Governors. External Link
    The leading index for each state predicts the six-month growth rate of the state’s coincident index. In addition to the coincident index, the models include other variables that lead the economy: state-level housing permits (1 to 4 units), state initial unemployment insurance claims, delivery times from the Institute for Supply Management (ISM) manufacturing survey, and the interest rate spread between the 10-year Treasury bond and the 3-month Treasury bill.
    A time-series model (vector autoregression) is used to construct the leading index. Current and prior values of the forecast variables are used to determine the future values of the index.

The model uses leading index components to predict the coincident index. The concept seems bogus, even more so with a closer look at the allegedly leading indicators.

Permits vs Starts

I question the use of housing permits as a leading indicator. Instead, I suggest using housing starts. Permits are essentially a leading indicator of a leading indicator and hugely wrong at economic turns.


Reliance on ISM data single-handedly makes the leading indicator report bogus.

For discussion, please see ISM a Leading Indicator? Of What?

Mike "Mish" Shedlock

Of course recession is close, we are nine years into the recovery. It’s a bit like looking at the setting sun and then say night is close. Even without looking at any models, you know we are long into the recovery cycle.

What a charade. The next crisis/recession will be the last under the current monetary regime

If you're not dependent on gov't,not receiving gov't backed loan,gov't bailout,gov't subsidy,gov't contract,a check in some shape or form from gov't,then yes you're spot on.

This chart is compelling Mish, thanks for posting it. There are a couple of points that can be made about it:

  1. Around 1997 it almost dropped to 2.5% then climbed back up again, and it is possible that can happen again.
  2. The overall trend is lower highs, so perhaps instead of a flat line at 2.5% we might be seeing a gradual systemic decline, so the trigger point may be getting lower.

Are we really in the 9th year of a 'recovery', or less than two years into a recovery that began Q3 2016? Question your premises, it's an important part of critical thinking.

Great chart Mish. I have an idea for a new economic indicator called the damaged car indicator. It seems like everywhere I go , I see cars that have been in minor accidents or even something worse with a door smashed in so it looks like people don’t have the time r money to repair their cars. I wonder has anyone noticed this?

So, we have a chart here, produced by the "Clueless" Fed. Is the Philly Fed more "cluefull" than say, the Dallas Fed or San Francisco?

Since 1985 the coincident indicators have signaled 6 times, with 4 of them preceding actual recessions. On the occasions where there was an actual recession, the signal appears to have been about 3 months ahead of the actual recession. Importantly, the market was still at a high in 1991 and 2007 when the coincident indicators gave their signal.

The ECRI's, Laksman Achuthan, said back in 2012 we were very close to a recession, maybe this is it ttps://www.youtube.com/watch?v=lI_ELbkRyCU