Recession looms as vital economic indicator drops for 18th consecutive month.
The recessionary drums are beating louder as a key U.S. economic gauge from The Conference Board dropped for the 18th consecutive month as the Federal Reserve’s rate hikes in response to soaring inflation are taking their toll on the economy.
The Leading Economic Index (LEI), which is a forward-looking gauge made up of 10 individual indicators, fell by 0.7 percent in August, The Conference Board said on Oct. 19.
The latest reading is worse than August’s 0.5 percent decline and brings the total six-month drop to 3.4 percent in the LEI measure, which is designed to predict business cycle shifts, including recessions.
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All but one of the LEI’s 10 individual indicators were negative last month.
“In September, negative or flat contributions from nine of the index’s 10 components more than offset fewer initial claims for unemployment insurance,” Justyna Zabinska-La Monica, senior manager, Business Cycle Indicators, at The Conference Board, said in a statement.
The labor market has remained tight despite the fact that the Federal Reserve has been cooling the economy by hiking interest rates at its fastest pace since the 1980s in a desperate bid to quash high prices.
Waning Consumer Strength
With persistently high inflation and a deteriorating economic outlook, September saw consumer confidence fall for the second consecutive month to hit a four-month low, according to The Conference Board.
Expectations about the economic outlook over the next six months also dropped below The Conference Board’s recession threshold of 80, reflecting waning confidence about business conditions, job availability, and earnings.
“Write-in responses showed that consumers continued to be preoccupied with rising prices in general, and for groceries and gasoline in particular. Consumers also expressed concerns about the political situation and higher interest rates,” Dana Peterson, chief economist at The Conference Board, said in a statement.
All that consumer worry is translating into reduced consumption, a big red flag as consumer spending is a key driver of the U.S. economy, accounting for a whopping two-thirds of gross domestic product (GDP).
Last week, the number of Americans filing new claims for unemployment fell to a nine-month low, indicating that companies are reluctant to let workers go despite the presence of economic headwinds.
“Companies on earnings calls may warn about the outlook and risks ahead, but they are still holding on tight to their workers as good help is increasingly hard to find,” Christopher Rupkey, chief economist at FWDBONDS in New York, told Reuters.
Commenting on The Conference Board’s latest downbeat economic signals, Ms. Zabinska-La Monica warned of the “risk of economic weakness ahead” as the U.S. economy struggles to maintain momentum.
“So far, the U.S. economy has shown considerable resilience despite pressures from rising interest rates and high inflation,” she said. “Nonetheless, The Conference Board forecasts that this trend will not be sustained for much longer, and a shallow recession is likely in the first half of 2024.”
Many economists see a relatively high probability of a recession in the coming year, with signals like waning consumer confidence an often-cited canary in the coal mine.
Further Fed interest-rate hikes are also potentially on the horizon, as Federal Reserve Chair Jerome Powell told a conference on Oct. 19 that inflation remains stubbornly high and that bringing it down to the central bank’s target of around 2 percent will likely require a slowdown in the economy and job market.
Housing Market Strain
The U.S. housing market, for example, is beginning to creak under the strain of high mortgage rates, which recently touched 8 percent.
Two years ago, mortgage rates were hovering around 3 percent, with the sharp run-up having a dampening effect on loan demand.
The Mortgage Bankers Association (MBA) said on Oct. 18 that mortgage application demand has plunged for the sixth consecutive week, to the lowest level since 1995.
“Both purchase and refinance applications declined, driven by larger drops for conventional applications,” said Joel Kan, MBA’s deputy chief economist.
“Purchase applications were 21 percent lower than the same week last year, as homebuying activity continues to pull back given reduced purchasing power from higher rates and the ongoing lack of available inventory,” he added.
With home loan-borrowing costs at multi-decade highs and many potential home sellers having locked in their mortgages at much lower rates, there are dual disincentives pushing down sales volumes.
Mr. Simon said that after a long period of cheap money cut short by the Federal Reserve’s rapid rate hikes in response to soaring inflation, consumers are now beginning to buckle.
“Consumers had an incredible 10-, 12-year run,” he told CNBC’s “Fast Money” program. “Markets were buoyant. Interest rates were low. Money was available.”
But with interest rates currently within the range of 5.25–5.5 percent, the era of cheap money has come to an end—and economic stresses are beginning to emerge.
A recent survey carried out in September by CNBC-Morning Consult found that 92 percent of U.S. adults have cut back on spending over the past six months.
Looking forward, over three-quarters of those polled said they plan to cut back on spending for non-essential items.
Former Walmart CEO Bill Simon said in an interview on CNBC recently that a series of factors—political polarization, inflation, and high interest rates—were all working together to undermine consumers and their propensity to spend.
“That sort of pileup wears on the consumer and makes them wary,” Mr. Simon told the outlet. “For the first time in a long time, there’s a reason for the consumer to pause.”
How are higher interest rates and limited inventory impacting the housing market and discouraging potential homebuyers?
Gage rates at lower levels, the housing market is facing headwinds. The combination of higher interest rates and limited inventory is discouraging potential homebuyers, resulting in a decline in mortgage applications.
The housing market is a critical component of the U.S. economy, as it drives demand for construction, home improvement, and various other industries. A slowdown in the housing market can have far-reaching implications and is often seen as a warning sign of an economic downturn.
The latest data from The Conference Board on the Leading Economic Index (LEI) further reinforces concerns about the economy. The LEI, which is a forward-looking gauge of economic activity, declined by 0.7 percent in August, marking the 18th consecutive monthly drop. This decline is worse than the previous month and brings the six-month drop to 3.4 percent, indicating a deteriorating economic outlook.
One of the main drivers of the economic weakness is the Federal Reserve’s response to high inflation. The central bank has been raising interest rates at the fastest pace since the 1980s in an effort to curb rising prices. However, these rate hikes are starting to take a toll on the economy. The labor market remains tight, despite the cooling measures, suggesting that the rate hikes are not having the desired effect.
Consumer confidence is also waning, with expectations about the economic outlook dropping below the recession threshold. Consumers are increasingly concerned about rising prices, particularly for groceries and gasoline. These worries are leading to reduced consumption, which is a significant concern as consumer spending drives two-thirds of the U.S. economy.
The ongoing economic weakness has raised concerns about the risk of a recession in the coming year. Many economists see a relatively high probability of a recession, with indicators like waning consumer confidence signaling potential trouble ahead.
In addition to these challenges, the housing market is also feeling the strain. High mortgage rates, which have recently reached 8 percent, are impacting loan demand. Mortgage application demand has plunged for the sixth consecutive week, reaching the lowest level since 1995. With borrowing costs at multi-decade highs, potential homebuyers are facing reduced purchasing power, further dampening homebuying activity.
The combination of economic weakness, waning consumer strength, and a strained housing market poses significant challenges for the U.S. economy. While the economy has shown resilience thus far, there are growing concerns that this trend will not be sustained for much longer. The Conference Board forecasts a shallow recession in the first half of 2024.
Addressing these challenges will require careful policy considerations. Further Federal Reserve interest-rate hikes may be necessary to tackle inflation, but they also risk exacerbating economic weakness. Policymakers will need to find a delicate balance between managing inflation and supporting economic growth.
In conclusion, the recent data on the U.S. economy and housing market indicate growing concerns about a possible recession. The Federal Reserve’s rate hikes and high inflation are taking a toll on the economy, leading to reduced consumer confidence and a strained housing market. Policymakers will need to navigate these challenges carefully to ensure the stability and growth of the U.S. economy in the coming months.
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