Recession ‘Near’ as US Leading Economic Index Drops for Tenth Straight Month

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The United States is approaching a recession, as a closely watched economic index dropped for the tenth straight month in January, for the longest slump since the Lehman Brothers collapse in 2008.

The Conference Board Leading Economic Index (LEI), released on Feb. 17, declined by 0.3 percent in January, following an 0.8 percent contraction in December.

The index fell 3.6 percent between July 2022 and January 2023, compared with a 2.4 percent drop from January to July of last year, as lackluster consumer spending is predicted for the rest of the year, pointing to a recession.

Several indicators are being blamed for the decline, including a shorter average workweek for employees, weaker manufacturing orders, and lower consumer expectations.

Over the past six months, the index has shrunk 4.2 percent, for the fastest six-month decline since the beginning of the pandemic.

The LEI data align with other recent surveys, such as a report from the National Association for Business Economics, which showed that most economists expect a recession sometime this year.

Fed Policy Making Markets Uneasy

The latest report from The Conference Board comes one day after Loretta Mester, president of the Federal Reserve Bank of Cleveland, said on Feb. 16 that more rate hikes may be necessary to cool down inflation.

Mester believes that although aggressive rate hikes by the Federal Reserve last year had managed to lower consumer level inflation, more is needed to be done to reach its target of 2 percent.

She said that there was a “compelling case” to increase the federal funds rate by another 50 basis points, after only a 25 basis-point increase last month, but not back to the 75 basis-point hikes that were prevalent last year.

Although a rapid increase in borrowing rates may cause inflation to cool faster, additional rate hikes would cause lending rates for vehicles and home mortgages to soar higher, hurting American consumers.

After the Fed hiked its benchmark rate seven consecutive times in 2022, many investors hoped that the central bank would slow down its hawkish policy at the beginning of the year, while others wanted policymakers to cut interest rates as soon as possible if the economy witnessed a sharp downturn.

A few investors hold out hope that Fed policymakers can still achieve their goal to lower inflation without pushing the economy into a recession.

The Fed’s decisions in its next few policy meetings will play a large part in determining whether the U.S. economy will achieve a soft landing or a crash.

Little Sign of Improvement in Inflation

Consumer-level inflation is showing little sign of slowing down, as prices increased in January by 0.5 percent, according to data from the U.S. Bureau of Labor Statistics. Annual inflation rates hit 6.4 percent, a mere downtick of just 0.1 percent from December, but an improvement from the 9.1 percent last June.

Meanwhile, U.S. wholesale prices increased by 0.7 percent in January, the largest gain since early last year, according to the Producer Price Index. This followed a 0.3 percent rise in November and a 0.2 percent price contraction in December.

The new reports led Fed Chairman Jerome Powell to state that more needed to be done to dampen inflation, despite some progress.

“It’s not going to be, we don’t think, smooth,” said Powell, adding, “it’s going to be bumpy.”

Recession Looks More Likely in 2023

“While the LEI continues to signal recession in the near term, indicators related to the labor market—including employment and personal income—remain robust so far,” said Ataman Ozyildirim, a senior director of economics at The Conference Board.

He noted a decline in new orders from the manufacturing sector, as consumer sentiment became negative and business conditions deteriorated.

“Nonetheless, The Conference Board still expects high inflation, rising interest rates, and contracting consumer spending to tip the U.S. economy into recession in 2023,” concluded Ozyildirim.

It appears that the LEI is showing no signs at recovering anytime soon, hitting its lowest level since February 2021.

The LEI is down 6.03 percent year over year, a bit better the 6.22 percent decline in December, but it is closing in on its biggest year-over-year drop since the market crash almost 15 years ago.