The critical question now affecting investors in financial markets is whether or not the US economy is heading for a “hard landing” or worse. A growing minority of economists is warning of a recession later this year or in 2007. But historical research into leading indicators of recessions over the past 50 years suggests that such concerns are premature. The US economy has, however, entered a sustained slowdown in growth and if the Federal Reserve were to tighten monetary policy further, the risks of a recession would increase significantly.

Milton Friedman most famously argued that inflation was a disease of money – so are recessions, or at least they are in the absence of some external and unpredictable cataclysmic event such as a meteorite landing on Manhattan. Armed with this insight, it is possible to construct a recession warning indicator capable of flashing its red light about six months ahead of a downturn, assuming of course that such a downturn is monetary in its origins.