Is a Recession Looming?

The Leading Economic Index (LEI), a monthly national economic gauge, fell 0.4% month-over-month in September, signaling a possible recession ahead.

The index helps “summarize and reveal common turning points in the economy in a clearer and more convincing manner than any individual component,” according to the Conference Board, a nonpartisan economic monitor that publishes the LEI metric.

Since March, the LEI has fallen 2.8%, raising concerns about a potential looming recession, but signals are still mixed.

Ataman Ozyildirim, senior director of economics at the Conference Board, said the index’s sliding trend is alarming.

“Its persistent downward trajectory in recent months suggests a recession is increasingly likely before year-end,” stated Ozyildirim.

There are 10 separate underlying metrics that make up the LEI, including jobless claims, stock market performance, and manufacturing health.

Complicating the question further is the fact that definitions of and criteria for a recession can vary. According to the National Bureau of Economic Research (NBER), a non-government agency, a recession is defined as a substantial, broad-based decline in economic activity lasting more than one quarter.

While the United States saw its GDP contract by 1.6% in the first quarter of 2022 and a further 0.6% in the second quarter, wages remained relatively robust. As such, the country has not yet seen all the factors that characterize a recession as per the NBER’s definition.

At the same time, however, the S&P 500 remains down by over 20% year-to-date, a historically severe drawdown not experienced in over half a century.

Still, while the stock market is hurting, jobless claims remain relatively healthy. The week ending on October 29 saw 217,000 initial jobless claims in the United States, an increase of only 1,000 over the previous week.

Directionally, the latest batch of jobless claims does not support predictions of a looming recession. At the same time, the substantial drop in the stock market does.

As previously reported in The Dallas Express, the Fed implemented another 0.75% interest rate hike to fight inflation. The Fed’s hikes are making borrowing increasingly more expensive, which is supposed to prompt a reduction in spending and, hopefully, slow price growth.

Hiking rates, however, is a delicate balancing act. The Fed wants to cool the economy, but not too much. Rate tightening, if too aggressive, risks harming the economy more than it helps.

Some economists do not necessarily believe that the Fed’s actions have been meaningfully impactful. According to Alessandro Rebucci, associate professor of economics at Johns Hopkins University, “Hard data on a monthly basis do not suggest the labor market overall is cooling fast…There are pockets of the labor market that have shed jobs, but it’s not widespread job loss.”

The LEI is constantly evolving as the underlying metrics are updated. For example, since the index was last published on October 20, consumer confidence — one of the components of the index — has fallen, and the Fed executed another round of rate tightening.

The direction of the index is not always clear, and some economists are not certain the index is revealing any strong recessionary signals at this point in time.

According to Rebucci, “We are in new territory and don’t fully understand everything that’s happening… It’s hard to form accurate expectations of where the economy is going.”