One economic growth measure acknowledged by market professionals but few else is the Conference Board’s Index of Leading Economic Indicators (LEI) that attempts to forecast future economic activity. And it is signaling an upcoming recession, according to its director.
“The US LEI fell again in September and its persistent downward trajectory in recent months suggests a recession is increasingly likely before yearend,” said Ataman Ozyildirim, Senior Director, Economics, at The Conference Board. “The six-month growth rate of the LEI fell deeper into negative territory in September, and weaknesses among the leading indicators were widespread. Amid high inflation, slowing labor markets, rising interest rates, and tighter credit conditions, The Conference Board forecasts real GDP growth will be 1.5 percent year-over-year in 2022, before slowing further in the first half of next year.”
So it is predicting contraction later this year: “The negative contributors—beginning with the largest negative contributor—were stock prices, average consumer expectations for business conditions, the ISM® New Orders Index, the Leading Credit Index™ (inverted), and manufacturers’ new orders for nondefense capital goods excluding aircraft,” said the LEI.
The labor market is slowing but it is still tight with initial jobless claims ultra-low, and inflation beginning to decline, which makes it less likely the U.S. slides into recession this year.
Prices are already plunging is many areas not covered by the standard inflation indexes. The New York Federal Reserve has said its September Survey of Consumer Expectations found that respondents projected their spending will rise by 6 percent over the next year, a sharp drop from the 7.8 percent rise predicted in the August survey. The bank noted that decline in spending expectations was the biggest since the survey began in 2013, while inflation expectations are holding steady, even declining slightly in the near term.
This will be a Federal Reserve induced recession if it materializes. Stock prices and consumer spending are down because of the higher interest rates, with the housing market, another leading indicator, already in recession.
The COVID pandemic and war in Ukraine have thrown a monkey wrench into economic policymaking because inflation reared up so quickly after the worldwide shutdown of economic activity, while governments and Central Banks spent $trillions in various COVID rescue packages in the face of worldwide shortages of goods and services—especially food and energy.
I quoted Adam Tooze, a well-regarded economic historian, last week as sounding the alarm in a recent NYTimes Opinion.
“We now find ourselves in the midst of the most comprehensive tightening of monetary policy the world has seen. And raising interest rates is not going to bring more gas or microchips to market, but rather the contrary. Reducing investment will limit capacity and thus reduce future supply”
Yet the Conference Board’s confidence index signals consumers are still upbeat, at least through the holidays, which makes it also less likely we see a downturn this year.
“…purchasing intentions were mixed, with intentions to buy automobiles and big-ticket appliances up, while home purchasing intentions fell,” said the Conference Board. The latter no doubt reflects rising mortgage rates and a cooling housing market. Looking ahead, the improvement in confidence may bode well for consumer spending in the final months of 2022, but inflation and interest-rate hikes remain strong headwinds to growth in the short term.”
In fact, Gross Domestic Product is predicted to grow more than 2 percent in Q3 and slightly less in the fourth quarter. So, no recession is yet in the works—at least this year.
Harlan Green © 2022
Follow Harlan Green on Twitter: https://twitter.com/HarlanGreen
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