Recession Signals Intensify as Key Economic Gauge Drops for 17th Straight Month

A pair of traders work on the floor of the New York Stock Exchange on Aug. 30, 2023. Richard Drew/AP Photo

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.

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.

Currently, the Atlanta Fed’s GDP nowcast, a real-time estimate of economic growth, sees the economy expanding at a 4.9 percent clip in the third quarter of 2023, seemingly a far cry from recession territory.

Economic analyst Mike “Mish” Shedlock, whose blog has been listed among Time magazine’s top 25 financial blogs, told The Epoch Times in an interview that he sees a double-dip recession coming.

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.”

Mr. Shedlock pointed to an alternative measure called GDPplus, developed about a decade ago by economists at the Philadelphia Fed, which incorporates an underused measure called gross domestic income (GDI) in its real-time estimate of economic activity.

“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 ( minus 3.4 percent) and the first quarter of 2023 (minus 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.

“I think it’s possible we were in recession, and are coming out of it now, and are going to head back into a double-dip recession” later this year, he said.

‘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.

The National Association of Realtors (NAR) reported on Sept. 21 that existing home sales fell 0.7 percent in August. In year-over-year terms, sales slumped 15.3 percent.

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.

In a recent post on his blog, Mr. Shedlock wrote that “real estate tooters keep telling me there is no crash” but the numbers point to a different reality.

“Despite denials in many corners, a crash is underway,” he wrote.

Meanwhile, Fed policymakers voted to leave interest rates unchanged at the latest Federal Open Market Committee (FOMC) policy meeting this week. With their vote, they decided to maintain the benchmark fed funds rate at a range of 5.25 percent to 5.5 percent, the highest in 22 years.

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.”