Tag Archives: leading indicators

How to forecast a recession

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April 24, 2025 — Everyone wants to know if a recession is imminent.  But the most popular recession indicators are not necessarily the best places to look for the answer.

The question is front and center in the US now because of concerns over actions by the Trump Administration.  Six factors currently might trigger a downturn:

  • the trade war,
  • crash in the US stock market,
  • chaotic cuts in USG spending,
  • a US fiscal crisis arising from government shutdown, debt limit stand-off, or credit downgrading,
  • the blocking of net immigration, and
  • increased uncertainty and risk (driven especially by the erratic rollout of US tariff policy), as reflected in sharp increases in the VIX and  bond premia.
  1. Leading indicators

How can we tell if a recession is near?  Consider as an analogy a sailing ship navigating through heavy fog, watching out for land, fearing to founder.  If the lookout sights certain birds, it is more likely that land is near.  (There are charts, but the captain refuses to use them.)  Analogously, some leading indicators may signal a heightened probability of recession. But only a probability; nothing is certain. read more

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Reserves and Other Early Warning Indicators Predict Crises After All

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With aftershocks of the recent global financial earthquake still being felt in some parts of the world, it would be useful to have a set of Early Warning Indicators to tell us what countries are most vulnerable.    Nobody should be surprised that it is hard to forecast crises with high reliability;    low-risk opportunities for profits are never easy to find.   Thus it is especially hard to predict the timing of a crisis.  Some economists, however, are skeptical that Early Warning Indicators (EWIs) have any useful predictive ability at all.  A common assessment is that EWIs have failed, in the sense that in each historical round of emerging market crises (1982, 1994-2001, 2008) those particular variables that appeared statistically significant in that round did not perform well in the subsequent round.   This is not the right conclusion. read more

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