Types of Economic Indicators

Leading indicators change direction before the broader economy does, typically by 6-18 months. They capture forward-looking dynamics: credit conditions, business confidence, and early labor market stress. Professional macro traders weight leading indicators most heavily because they provide the earliest signal of regime change.

Key leading indicators tracked on Convex:

• Yield Curve (10Y-2Y Spread) -- Has inverted before every US recession since 1970. When short-term rates exceed long-term rates, it signals that the bond market expects economic deterioration ahead. The typical lead time is 12-24 months.
• Initial Jobless Claims -- Weekly filings for unemployment insurance. Rising claims indicate deteriorating labor market conditions before layoffs show up in the monthly unemployment rate. The 4-week moving average smooths weekly volatility.
• Building Permits -- Advance approvals for new construction. Since housing is highly rate-sensitive, permits decline early when monetary tightening begins to bite. A sustained drop in permits has preceded every post-war recession.
• ISM Manufacturing PMI -- A survey of purchasing managers. Readings below 50 indicate contraction. The new orders component is especially forward-looking, as it captures demand that has not yet been produced.
• Conference Board LEI -- A composite of 10 leading indicators. Six consecutive monthly declines in the LEI has preceded every recession since the 1960s.

The Convex Recession Probability Index (CRPI) synthesizes five of these leading signals into a single 0-100 composite. When CRPI crosses above 60, the majority of recession transmission mechanisms are active simultaneously.

Coincident indicators move in real time with the business cycle. They measure what is happening right now, not what will happen next. The NBER Business Cycle Dating Committee relies heavily on four coincident indicators to officially determine recession dates.

• Real GDP -- The broadest measure of economic output. Two consecutive quarters of GDP contraction is the popular (but unofficial) definition of recession. Released quarterly with significant lag.
• Industrial Production -- Monthly output of manufacturing, mining, and utilities. More timely than GDP and captures the goods sector of the economy. Sustained declines typically accompany recessions.
• Real Personal Income (excluding transfers) -- Income from wages, salaries, and business activity, adjusted for inflation. Falls during recessions as hours are cut and hiring freezes.
• Nonfarm Payrolls -- Monthly employment changes. While often classified as coincident, the establishment survey tends to turn slightly after the economy does. Revisions to prior months can be more informative than the headline number.

Coincident indicators are useful for confirming whether a recession identified by leading indicators has actually begun. If leading indicators are flashing warning but coincident indicators remain strong, the recession may still be 6-12 months away.

Lagging indicators confirm economic trends after they are well established. Trading solely on lagging indicators means you are always late. Their value is in verification: if lagging indicators confirm what leading indicators predicted, the trend is durable.

• Unemployment Rate -- Peaks months after a recession has already started. Businesses exhaust other cost-cutting measures before layoffs, so unemployment rises late and recovers late.
• CPI Inflation (year-over-year) -- Price pressures build during expansions and persist into downturns. Inflation typically peaks after the business cycle has already turned.
• Corporate Profits -- Reported quarterly with a significant lag. Profits compress as revenue slows and cost-cutting has not yet offset weaker demand.
• Average Duration of Unemployment -- Rises well after a recession begins and stays elevated long after recovery starts, as long-term unemployed workers are the last to be rehired.

Market-based indicators are derived from financial markets rather than government statistical agencies. They update in real time and reflect the collective expectations of thousands of market participants. Their advantage is speed; their disadvantage is susceptibility to sentiment extremes and positioning noise.

• High-Yield Credit Spreads -- The premium junk bonds pay over Treasuries. Widening spreads signal rising default expectations and credit market stress. Sharp widening has preceded or coincided with every recession since the 1980s.
• VIX (Implied Volatility) -- Derived from S&P 500 options pricing. Spikes above 30 indicate fear; sustained readings below 15 suggest complacency. The VIX is mean-reverting, so extreme readings in either direction tend to reverse.
• Equity Indices (S&P 500) -- The stock market is a leading indicator of economic activity, though it produces many false signals. The saying "the market has predicted nine of the last five recessions" captures both its forward-looking nature and its tendency to overreact.
• Breakeven Inflation Rates-- The spread between nominal and inflation-protected Treasury yields. Reflects the bond market's inflation expectations over 5 or 10 years. Rising breakevens suggest markets expect the Fed to fall behind on inflation.

The Convex Risk Appetite Index (CRAI) blends several market-based indicators into a single risk appetite reading, filtering out the noise of any individual market signal.

Sentiment indicators measure what market participants think and how they are positioned. They are primarily useful as contrarian signals: extreme bullishness often precedes pullbacks, and extreme bearishness often precedes rallies.

• AAII Bull-Bear Spread -- The American Association of Individual Investors surveys retail sentiment weekly. When the spread reaches extreme bullish readings (above +30), markets have historically underperformed. Extreme bearish readings (below -20) have preceded above-average returns.
• CFTC Commitments of Traders (COT) -- Weekly positioning data for futures markets. Tracks commercial hedgers vs speculative positioning. Extreme speculative longs or shorts in commodities, currencies, and bonds are contrarian signals.
• Margin Debt -- Total borrowed money in brokerage accounts. Rapid margin debt growth signals speculative excess. Sharp deleveraging (margin calls) can accelerate selloffs.

The Convex Net Vulnerability Index (NVI) incorporates sentiment and positioning metrics alongside financial conditions data to gauge systemic vulnerability to shocks.