Oct

Are we heading for a recession? Leading indicators say “yes”

Brian Butler on October 16th, 2008

GloboTrends columnist Bio: Brian Butler is a specialist in “global-macro” economic analysis. As a global-macro analyst, Brian founded “GloboTrends“, an online site for macro-economic trend analysis, with a focus on providing this analysis to global investors. The highly popular “GloboTrends blog” is prominently displayed on Thunderbird’s MBA website , and has been featured as syndicated content on Nouriel Roubini’s RGE Monitor, Emerginvest.com, Business Week Exchange, Wikinvest.com, and other reputable news outlets.

The big question on everyone’s mind is: “are we in a recession?” and “are we heading towards one?”. While on the surface this seems like it should be an easy question to answer, economists surprisingly have a difficult time predicting what is going to happen (with any high degree of accuracy).

In this article, Im going to outline some of the more popular ways in which investors look at the economy and try to make bets about which way the market is heading. If you are wondering if we are heading for a recession, here are some leading indicators for you to consider…

1. The Spread of “junk” bonds (high yield bonds) over Treasuries:

If the spread of junk bonds over comparable Treasuries widens, that is a good indicator that bond traders are expecting a recession. Risk premiums, or spreads, on speculative bonds in 10/2008 (the middle of the credit crisis) widened to the highest level since the great depression, indicating that bond speculators were pricing in a huge recession.

2. The Baltic Dry Index:

The Baltic dry index is a leading indicator that tells us how much competition there is for the given stock of sea containers. Its a benchmark for global freight costs (indicator that mirrors price of shipping bulk products such as iron ore, coal or grains. In recent months we see a near collapse of the price of shipping products around the globe. While this may appear good on the surface (exporters will pay less to ship their goods to market), it is also a worrying indicator because simple laws of supply and demand usually indicate that if the price drops suddenly, that is likely due to decreased demand (for containers on the sea). This means that Chinese steel mills are ordering less iron ore from places like Brazil and Australia, and it usually is a leading indicator that global slowdown in the “real economy” is quickly approaching.

3. The Purchasing Managers Index:

The PMI is another leading index which measures the rise and fall of manufacturing in the USA….is a leading indicator of economic activity. By looking at the forward looking PMI data, you can get a feeling about how professional purchasing professionals are betting on the economy.

Alternative methods to predict the Future:

In addition to the standard tools listed above, there are a number of innovative websites that are attempting to use technology and crowd-sourcing to predict the future. Here is a list of sites that try to predict what is going to happen next….enjoy…