Bad Times, Good Times: Economic Indicators Down in December but Slightly Improved

A forward-looking gauge of economic activity continued to soften in December, though the overall rate of decline improved in the last six months of 2023.

The Conference Board’s Leading Economic Index fell by 0.1% in December, below expectations, yet contracted by 2.9% over the past six months, down from 4.3% for the prior six-month period.

“The US LEI fell slightly in December, continuing to signal underlying weakness in the U.S. economy,” Justyna Zabinska-LaMonica, senior manager for business cycle indicators at The Conference Board, said in a statement. “Despite the overall decline, six out of 10 leading indicators made positive contributions to the LEI in December.

“Nonetheless, these improvements were more than offset by weak conditions in manufacturing, the high interest-rate environment, and low consumer confidence,” Zabinska-LaMonica added. “As the magnitude of monthly declines has lessened, the LEI’s six-month and 12-month growth rates have turned upward but remain negative, continuing to signal the risk of recession ahead. Overall, we expect GDP growth to turn negative in Q2 and Q3 of 2024 but begin to recover late in the year.”

Economists at Wells Fargo said in an email after the index’s release that “while the leading economic index continues to signal recession, a milder pace of contraction and broad-based improvements in the index’s components suggest activity, especially in interest-rate sensitive sectors, has found a floor.”

The index does have a history of predicting recessions. Still, some have argued it has proved less reliable as the economy has recovered from the COVID-19 pandemic, given how much money was pumped into the economy by Congress and the Federal Reserve. There were also severe disruptions to global supply chains over the past couple of years that largely have been eliminated.

Moreover, other recent economic data – consumer sentiment, retail sales and jobless claims – has been positive and consistent with an expanding economy. Whether that continues into 2024 is now a matter of debate among economists.

On Thursday, the Commerce Department will release its first estimate of fourth-quarter gross domestic product growth for 2023, with forecasts of a number in the 1.7% to 2% range. That will put a cap on a year which turned out to be much stronger than anticipated at its start, when many economists were predicting a recession.

Now, the same economists have largely bought into the idea of a soft landing for the economy, in which growth slows along with declining inflation and a recession is avoided.

There also are those who see that as too rosy a scenario, however.

“The steady decrease in the pace of inflation around the world in recent months is encouraging for policymakers,” Shaan Raithatha, a senior economist at Vanguard, wrote in the firm’s monthly economic outlook Monday. “However, should the tensions in the Middle East escalate or continue for an extended period, the risk does increase for an upswing in inflation through higher goods prices, as well as through the potential for energy supply disruption.”

The Fed has its first meeting of 2024 later this month after keeping interest rates unchanged in December. The Fed indicated then that members of its monetary policy committee favored at least three cuts in rates this year.

While some on Wall Street believe the central bank will begin cutting rates as early as this spring, Vanguard is more cautious, seeing rate cuts coming in the second half of the year.

“We believe that market expectations for earlier cuts don’t acknowledge the challenges of bringing inflation down that last mile to many central banks’ 2% targets, given stickier wage-related services inflation,” Raithatha said. “The risk of a new advance in goods prices due to protracted geopolitical tensions could give central bankers something else to consider.”