Recession signals worsen as vital economic gauge falls for 17th consecutive month.
The Recessionary Drums are Beating Louder
The recessionary drums are beating louder as a key U.S. economic gauge from the Conference Board dropped for the 17th consecutive month, with a major factor being the Federal Reserve’s aggressive rate hikes.
The Leading Economic Index (LEI), which is a forward-looking gauge that includes 10 individual indicators, fell by 0.4 percent in August, the Conference Board said on Sept. 21. The latest reading brings the total six-month drop to 3.9 percent in the LEI measure, which is designed to predict business cycle shifts, including recessions.
“With August’s decline, the US Leading Economic Index has now fallen for nearly a year and a half straight, indicating the economy is heading into a challenging growth period and possible recession over the next year,” Justyna Zabinska-La Monica, senior manager, Business Cycle Indicators, at The Conference Board, said in a statement.
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She said that the leading index was negatively impacted by weak new orders, deteriorating consumer expectations for future business conditions, tighter credit conditions, and the Federal Reserve’s aggressive rate hikes.
“All these factors suggest that going forward economic activity probably will decelerate and experience a brief but mild contraction,” she said.
The Conference Board expects gross domestic product (GDP) to expand by 2.2 percent in 2023, and then fall to 0.8 percent in 2024.
Double-Dip Recession?
The country has been on recession watch for some time, with some analysts arguing that America fell into a recession last year—and is due for another one.
The first two quarters of 2022 saw America’s economic output contract at a 1.6 percent annual rate in the January-March quarter and at a 0.6 percent annual rate from April through June.
By one common definition of recession (two consecutive quarters of negative growth), that would mean the United States fell into a downturn.
A double-dip recession is where a downturn is followed by a brief gasp of recovery—before turning negative and once again falling into a recessionary zone.
“We’ve never had indicators like that, for this long, without the economy being in recession. Period,” Mr. Shedlock said when asked for comment on the latest leading economic indicators from The Conference Board, adding that he believes many economists see the writing on the wall pointing to a contraction but “they’re afraid to say it right now.”
“Around recessions, gross domestic income is often the far better of the two measures,” he said.
The Philly Fed’s numbers, which show quarter-over-quarter rates of growth, indicate that GDI was negative for the fourth quarter of 2022 (-3.4 percent) and the first quarter of 2023 (-1.8 percent), before turning positive (0.5 percent) in the second quarter of 2023.
When examining the Philly Fed’s numbers and other data, Mr. Shedlock said he sees another recession ahead.
‘A Crash Is Underway’
Data from the housing market, traditionally one of the last to turn over in a recession, has also flashed warning signs.
At the same time, the median existing-home sales price climbed 3.9 percent from one year ago to $407,100, which is the third consecutive month of prices breaking above $400,000.
Commenting on the sharp decline in transactions without a corresponding collapse in house prices, Mr. Shedlock said it’s an unusual dynamic and blamed the Fed’s easy money policies for introducing market distortions.
“I’ve never seen one before where we’ve had a transaction crash without a price crash,” he said. “But this is what the Fed has produced.”
He expects the situation to stay that way as long as the Fed keeps interest rates high. Mr. Shedlock blamed the Fed for ignoring obvious inflation signals and keeping its foot on the monetary gas pedal by continuing with its asset-buying program known as quantitative easing—and by keeping interest rates at near zero for too long.
The Fed overlooked building pressure in house prices in part because the standard measure of inflation, the Consumer Price Index (CPI), doesn’t directly capture home prices but uses rent and something called owners’ equivalent rent, which is what people who own their home would pay if they had to rent it.
“So ignoring all that was ignoring inflation,” he said, adding that when the pandemic hit, the Fed ignored all the bubbles its free-wheeling monetary policies created and slashed interest rates.
“It’s a dilemma the Fed has made,” he said.
“Despite denials in many corners, a crash is underway,” he wrote.
At the same time, Fed officials left the door open for one more rate increase before the end of the year and indicated smaller rate cuts in 2024.
FOMC members noted that U.S. economic activity had been growing at a “solid pace” and that ”inflation remains elevated.”
How has the Federal Reserve’s aggressive rate hikes affected businesses, consumers, and the overall economy?
R”>GDPNow model, which provides a real-time estimate of GDP growth, is projecting a 0.2 percent growth rate for the third quarter of 2023.
There are several factors contributing to the growing concerns of a recession. One of the main factors is the Federal Reserve’s aggressive rate hikes, which have been aimed at preventing inflation from spiraling out of control. While these rate hikes have been successful in curbing inflation, they have also been putting pressure on businesses, consumers, and the overall economy.
The Federal Reserve has been gradually increasing interest rates since 2022, with the goal of normalizing monetary policy after years of near-zero rates following the global financial crisis. However, these rate hikes have made borrowing more expensive for businesses and consumers, which has led to decreased spending and investment. This, in turn, has slowed down economic growth and increased the risk of a recession.
Another factor impacting the economy is the decline in new orders and consumer expectations. Weak new orders indicate a decrease in demand for goods and services, which can lead to decreased production and job cuts. Deteriorating consumer expectations for future business conditions can also result in reduced consumer spending, further dampening economic growth.
Tighter credit conditions are also contributing to the economic slowdown. As interest rates rise, it becomes more difficult for businesses and individuals to obtain credit, which can hamper investment and spending. This tightening of credit conditions can create a negative feedback loop, as reduced spending and investment lead to slower economic growth, which, in turn, can make it even more difficult for businesses and individuals to obtain credit.
The Conference Board’s leading economic index provides valuable insights into the future direction of the economy. The index is designed to predict business cycle shifts, including recessions. Its continuous decline over the past year and a half suggests that the economy is heading into a challenging growth period and a possible recession over the next year.
While the Conference Board expects GDP to expand by 2.2 percent in 2023, it also predicts a significant contraction in 2024, with GDP growth slowing down to 0.8 percent. This projection further supports the concerns of a possible double-dip recession, with some experts arguing that the country may have already entered a recession in the previous year.
It is important to note that the economy is influenced by various factors, both domestic and international, and predicting its trajectory with certainty is challenging. However, the recent decline in the Conference Board’s leading economic index, coupled with other indicators pointing towards a possible economic slowdown, is a cause for concern.
Policy decisions, such as the Federal Reserve’s handling of interest rates, will play a crucial role in shaping the economy’s path in the coming months. Finding the right balance between curbing inflation and supporting economic growth will be crucial to avoid a protracted period of stagnation or recession.
As the recessionary drums beat louder, policymakers, businesses, and consumers should closely monitor the evolving economic indicators and be prepared to adapt to changing conditions. It is essential to take proactive measures to mitigate the potential impacts of a recession and ensure the long-term stability and growth of the economy.
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