Leading Indicators Continue to Signal a Recession

A gauge of future economic activity declined in October, after falling in September, on worsening consumer expectations, the Conference Board reported on Monday.

The business organization’s leading economic index fell 0.8% to 103.9, slightly worse than expected. On a six-month basis, the index is down 3.3%, an improvement over the 4.5% decline in the prior six-month period.

“The US LEI trajectory remained negative, and its six- and twelve-month growth rates also held in negative territory in October,” said Justyna Zabinska-LaMonica, senior manager, business cycle indicators at the board. “After a pause in September, the LEI resumed signaling recession in the near term.”

“The Conference Board expects elevated inflation, high interest rates, and contracting consumer spending – due to depleting pandemic saving and mandatory student loan repayments – to tip the US economy into a very short recession. We forecast that real GDP will expand by just 0.8 percent in 2024,” Zabinska-LaMonica added.

The index has been a reliable indicator of prior downturns and many economists now see a recession sometime in 2024, although most are forecasting a mild contraction in economic activity. That forecast was also made for 2023 but so far has proven incorrect.

Indeed, the economy grew at an annual rate of 4.9% in the third quarter, but most forecasts have it slowing in 2024 to a rate closer to 2%. Meanwhile, the labor market has been holding up and consumers have been spending heading into the critical retail holiday season.

Economists have been baffled by the strength of the recovery since the COVID-19 pandemic hit in 2020. Most recent recessions have been caused by financial shocks, as occurred in 2007-2009. But a bout of aggressive interest rate hikes designed to quell inflation has had less of an effect this time around in slowing down the economy as massive amounts of monetary stimulus from 2020 to 2022 put a lot of money in consumers’ pockets. Some estimates place the amount of residual savings at $400 billion, down from its original estimate of $2 trillion. Home prices have also held up, and the stock market is still at high levels after a correction in early fall.

A recent drop in gasoline prices is also fueling customer’s wallets just in time for the Thanksgiving travel period.

The Federal Reserve will release the minutes from its meeting earlier this month, but analysts are forecasting the central bank is done with raising interest rates.

“The minutes of the Fed’s November 1 meeting will likely show FOMC members see a path clearing toward interest rate cuts in 2024,” economists at Comerica Bank wrote in their weekly preview on Monday. “Existing home sales likely edged lower in October. Sales will likely fall in November after mortgage rates’ October surge, then recover in the winter months with mortgage rates coming back down and seasonal comparisons easier.”