- by New Deal democrat
I’ve been writing about the economy, and employing forecasting models, for over 20 years. For the entire duration of the period, there have been portents of DOOOM written about by many others. I have been much more cautious, going on “Recession Watch” only twice since 2008: in 2019 and late 2022. I have never gone on “Recession Warning.”
Which is broadly concurrent with the economy since then. Since June 2009, the economy has been in recession for only the 2 month period immediately after COVID hit and brought society to a near standstill. For the other 200+ months, it has been expanding.
We’ll never know if, absent COVID, there would have been a recession in 2020, although at the time I believed we were going to narrowly miss it. But in 2022, the broad warning signs were manifest - and yet no recession occurred anyway.
So, after 20 years, I think it’s time to examine whether the broad range of long leading indicators hold up. I make use of the 4 identified by Prof. Geoffrey Moore in the 1980s (and subequently used by ECRI), plus common measures of the yield curve, and also real retail sales per capita.
Let me start with Prof. Moore’s four components [Note: all of the below graphs use YoY% comparisons for easier viewing; although the models generally use the absolute measures]. Here are corporate bonds, corporate profits deflated by labor costs, real money supply, and housing permits, covering the periods of 1960-94, 1995-2026:
Although the data is very noisy, when we look for periods when *all 4* components were at or below 0, the only such times were roughly 1 year before the onset of each recession, plus 1966, as well as the 2019 and 2022 periods. Plus last year, as shown in this close-up
Between December 2024 and May 2025 all four were negative. Again, although we came close last year, no recession has occurred as of June 2026.
Next, let me compare corporate bond yields as above with the 10 year Treasury minus 2 year yield, calculated as the YoY change (thus, for example, if the spread declined form +0.40% to +0.20%, this shows up as a -0.20% change). Here’s the entire period from the mid-1970s to the present:
While both measures are negative before the onset of recessions - frequently reverting to positive immediately beforehand as the Fed lowers interest rates - there are a number of false positives as well, in 1984, 1994, 2016, and very much so in 2022. The message I take away from this is that interest rate changes are probative, but they give too many false positive recession signals. Meanwhile, housing measures, while also probative, focus on too narrow a slice of the economy.
So let’s turn to the broad “real world” long leading indicators, comparing corporate profits and real retail sales per capita. Here’s what they look like from 1953-2000, 2001-2019, and 2020-present:
I’m much more satisfied with this measure. The only times both measures (using a 3 month moving average for real retail sales per capita) have been simultaneously negative has been shortly before recessions have begun, with the false positive of 1966 and one quarter in 2022.
And those two misses have something in common: massive fiscal stimulus. In 1966 LBJ’s “guns and butter” budget poured massive amounts of spending into both military spending and domestic social program spending. In 2021, the COVID stimulus had led to an abrupt 15% increase in retail spending, but with an absolute lower level of employment. Profits boomed, then paused, but clearly could - and did - boom further as businesses amped up production and hired more employees as the COVID supply bottlenecks unspooled.
This is an intellectual work in progress, so there is much more to think about. But preliminarily, my takeaway is that while interest rates and real money supply are important background conditions, that is all they are. The “real world” early indicators from housing, corporate profits, and real consumer spending per capita are necessary for confirmation. And I need to take a more detailed look at fiscal conditions and price level shocks, which often seem to be precipitating elements for recessions.
