By Naveen Athrappully
The American economy is signaling growing signs of slipping into a recession as the Leading Economic Index (LEI) continued its monthly decline in April, predicting a deterioration in the economic outlook.
The Conference Board’s LEI for the United States fell by 0.6 percent in April following a 1.2 percent decline in March, according to a May 18 press release. “The LEI for the US declined for the thirteenth consecutive month in April, signaling a worsening economic outlook,” said Justyna Zabinska-La Monica, a senior manager at The Conference Board. “The LEI continues to warn of an economic downturn this year. The Conference Board forecasts a contraction of economic activity starting in Q2 leading to a mild recession by mid-2023.”
LEI provides an early indication of significant turning points in the business cycle and where the economy is heading in the near term.
In a May 18 tweet, Lisa Abramowicz, a host at Bloomberg, pointed out that “we’re in the midst of the longest streak of negative reads on the Conference Board’s leading indicators since a period ending March 2009.”
Parker Ross, global chief economist at Arch Capital Group, noted that the pace of LEI’s annual decline is “faster than what has preceded prior recessions.”
“It is unusual for the index to have declined this much y/y without a recession and the nascent deceleration in the pace of the decline is unusual for recessionary periods,” he said in a May 18 tweet.
Of the 10 components in the LEI index, only stock prices and manufacturers’ new orders for capital and consumer goods registered positive growth.
Rate Hikes and Recession
A key factor fanning recession concerns is the Federal Reserve’s interest rate hikes. Since March 2022, the Fed has raised its benchmark interest rates 10 times from near zero to a range of 5 to 5.25 percent, which is the highest level since September 2007.
Investors are worried that continuing the policy of rate hikes would end up harming the economy as it pushes up the cost of consumer and business loans. The hikes can force consumers to reduce spending, which can then affect business profits and boost unemployment.
In a May 1 letter, 10 Senators and Representatives led by Sen. Elizabeth Warren (D-Mass.) and Rep. Pramila Jayapal (D-Wash.) expressed concerns about how the Fed’s tightening efforts could trigger a recession.
“We write regarding our concern about the Federal Reserve’s monetary policy strategy and its potential to throw millions of Americans out of work,” they wrote in the letter while warning that an “overreaction “could leave the economy more “vulnerable.”
A probability model from the New York Federal Reserve calculates the risk of the United States slipping into a recession within the next year at 68.2 percent, which is the highest since 1982.
The indicator’s value is now greater than it was in November 2007 before the subprime crisis. At the time, the probability of recession was only 40 percent.
A March report by Capital Economics states that they are now “even more convinced” about America falling into a recession this year due to a further tightening in credit conditions triggered by the acute bank stress.
“With core inflation remaining stickier than we had originally expected, however, the Fed probably won’t begin cutting its policy rate until September,” Capital Economics said.
“Furthermore, while we would still describe our baseline scenario as a softish landing since the peak-to-trough fall in GDP is less than 1 percent and the unemployment rate peaks at a modest 5 percent, the downside risk of a much harder landing is rising.”
In an April 30 tweet, billionaire entrepreneur Elon Musk said that a mild recession is “already here” and that further rate hikes by the Fed will only trigger a “severe recession.”