OECD Composite Leading Indicator

The above chart displays the OECD’s Composite Leading Indicator (CLI) for the United States from January 1, 1980 onward. The gray bars represent recessionary periods as determined retrospectively by the NBER.

A composite leading indicator (CLI) is designed to measure when the economy is pulling away from its long-term trend. Here the focus is on turning points in the graph which precede shifts in the business cycle by about six to nine months.

The difference between current levels of economic activity and its long-term potential is known as the “GDP gap.” A reading on the index above 100 predicts a positive GDP gap over the next six to nine months, e.g. that GDP will be above the long-term trend. Conversely, readings below 100 suggest a negative GDP gap. The levels of the index should be interpreted as the strength of the signal but they do not indicate how big the GDP gap will be in either direction. For more details regarding the nuances of the index and how to interpret it, see this document.

In May of 2021, the strength of the positive signal that the index had been giving since February of that year began to decrease. Subsequently, the index dropped below 100 in January of 2022, predicting that for the next six to nine months, the economy will underperform its long-term trend. The strength of this negative signal has continued to strengthen during the course of 2022, but is not yet as strong as it was during the COVID-19 recession or the Great Recession.

One of the major strengths of the OECD CLI is that it incorporates a number of component measures that can serve as leading indicators on their own, but when combined provide a more reliable and accurate signal. These include some measures discussed on this website, namely interest rate spreads, consumer confidence and producer confidence in manufacturing in addition to weekly hours worked in manufacturing, housing starts, durable goods orders and NYSE share prices.