Wonk Attack: Interest Rate Spreads & LEIs

I have previously mentioned Paul Kasriel’s work with interest rate spreads and leading economic indicators.

Paul notes that if you don’t like the reconfigured LEIs — and I was critical of the white wash the cheerleaders at the Conference Board did to cover up the inverted yield curve — you can
still derive value from them.

His suggestion: Corroborate the LEI signals by also looking at the negative spread between the yield on
the Treasury 10-year security and the federal funds rate (on a
four-quarter moving average basis) and a year-over-year contraction in
the quarterly average of the CPI-adjusted monetary base.

Let’s call these two charts the Kasriel Recession-Warning Indicator:


The 1966 LEI signal was false, but the Rate Spread should have kept you out of trouble.



Regardless, the combo of both of these have flipped negative, suggesting that the economy is slowing down . . .



Recession Imminent? Both the LEI and the KRWI are Flashing Warning
Paul L. Kasriel
Northern Trust March 22, 2007

Category: Economy, Fixed Income/Interest Rates

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