A key indicator that gauges the health of the American economy fell for the tenth straight month in December, exceeding forecasts and suggesting a potential recession in the months ahead.
“The U.S. LEI fell sharply again in December—continuing to signal recession for the U.S. economy in the near term,” said Ataman Ozyildirim, senior director, economics, at The Conference Board.
“There was widespread weakness among leading indicators in December, indicating deteriorating conditions for labor markets, manufacturing, housing construction, and financial markets in the months ahead,” he said.
Ozyildirim expects the coming quarters to see overall economic activity potentially turning negative before it picks up again in the last quarter of this year.
The 1 percent decline in the LEI exceeded forecasts by a poll of economists by Reuters, which had registered a median expectation of a 0.7 percent decrease.
Meanwhile, The Conference Board’s Coincident Economic Index, which measures current activity, rose by 0.1 percent in December. Among the multiple components of the CEI, only the Industrial Production Index contributed negatively. Industrial production fell for the third consecutive month in December.
Recession Looms
The LEI usually peaks a year ahead of a likely recession on average, according to The Conference Board. It last peaked in February 2022.Among components in the LEI, only three of them—S&P 500 Index of stock prices, interest rate spread, 10-year Treasury bonds less federal funds, and manufacturer’s new orders, consumer goods and materials—registered positive growth.
Stock Market Impact
In an interview with CNBC on Jan. 23, Liz Young, head of investment strategy at SoFi, said that recession has likely not been priced into stocks. The average stock market decline in a recession comes to 44 percent, she pointed out.The market has to fall at least 30 percent from its recent highs in order to suggest that the possibility of a recession has become a serious thought in the minds of investors.
Given the current level of the market, the S&P 500 will have to fall by 16 percent. If there is a meaningful decline in corporate profits, it could also indicate a deeper recession, Young suggested.
A December survey of economists by Bloomberg found that the odds of a recession in the United States this year was seven in 10, up from 65 percent in November. Consumer spending is expected to barely grow in the middle half of 2023. Roughly two-thirds of the U.S. GDP is accounted for by consumer spending.