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Chart of the Week: The McCulley Indicator Just Hit a Six-Year Low. Is a Recession on the Horizon?

Chart of the Week: The McCulley Indicator Just Hit a Six-Year Low. Is a Recession on the Horizon?

The “McCulley indicator” just hit its lowest level since 2009. Named after the former PIMCO managing director Paul McCulley, the indicator measures orders of capital goods excluding military orders and plans (aka “core” capex orders), which declined 7.9% in September to the prior year. The three-month moving average of capex orders also declined to 5.9% last month, the lowest in years, Business Insider reports. What this all means is that companies are not investing in the equipment that would help future production and that the manufacturing sector continues to be weak.

"With orders down a further 0.3% [month-on-month] in Sep., what had looked like an incipient recovery in core capital goods orders now looks like flat trend," Pantheon Macroeconomics' Ian Shepherdson writes. "That's still a vast improvement, though, after the 8.9% drop between Sep and Feb, as oil companies slashed their spending."

Despite McCulley’s insistence that the indicator is the best tool for predicting recessions, however, it isn’t always accurate. In 2012, the indicator fell below zero and no recession came. [BI]