Earnings as leading indicator

U.S. equity earnings appear to have declined, if ever so slightly, in 2011:Q4 from 2011:Q3. (Click on "Index earnings" to see the data, in xls format.)

I was curious to see whether stock earnings are leading, lagging, or coincident with the business cycle, so I put together some data. Below are the dates for the cyclical peaks of the economy, as determined by the NBER, the peak of the inflation-adjusted Shiller earnings, and the lead or lag between earnings and the economy:

Economy peak	Real earnings peak	Lead (+) / Lag (-), in months
Oct. 1873	Nov. 1873	-1
Mar. 1882	Jan. 1881	14
Mar. 1887	Dec. 1886	3
Jul. 1890	Jan. 1890	6
Jan. 1893	Jun. 1892	7
Dec. 1895	Jan. 1896	-1
Jun. 1899	Dec. 1899	-6
Sep. 1902	Dec. 1902	-3
May. 1907	Jul. 1906	10
Jan. 1910	Jan. 1910	0
Jan. 1913	Dec. 1912	1
Aug. 1918	Dec. 1916	20
Jan. 1920	Dec. 1916
May. 1923	Dec. 1923	-7
Oct. 1926	Aug. 1926	2
Aug. 1929	Dec. 1929	-4
May. 1937	Sep. 1937	-5
Feb. 1945	Jun. 1945	-4
Nov. 1948	Jul. 1949	-8
Jul. 1953	Sep. 1953	-2
Aug. 1957	Mar. 1956	17
Apr. 1960	Aug. 1959	8
Dec. 1969	Jan. 1969	11
Nov. 1973	Dec. 1973	-1
Jan. 1980	Sep. 1979	4
Jul. 1981	Sep. 1979
Jul. 1990	Mar. 1989	16
Mar. 2001	Sep. 2000	6
Dec. 2007	Jun. 2007	6
	Avg.	3.3
	Median	2.0

The average lead time is 3.3 months, and the median lead is 2 months. There is substantial dispersion, though: from a maximum of 20 months, to a minimum of -6 (i.e. the earnings peak occurred six months after the economy peaked). For the last three recessions, earnings crested before the economy did.

That is not to say, of course, that every earnings peak is a foreboding of recession. In part the trick lies in defining a "peak" for earnings. There have been multiple local maximums over the decades, with no ensuing recession. Still, a possible peak in earnings adds to the body of evidence that suggests that the odds of a recession in the near term are high.