Economic Expectations Gauge Plunges Signaling a Looming Recession

Over the next six months, it is estimated that fewer American consumers plan on buying homes or big-ticket appliances.

Traders work on the floor of the New York Stock Exchange (NYSE) during morning trading in New York City on Jan. 11, 2024. Angela Weiss/AFP via Getty Images

Three key U.S. economic indicators declined in April, signifying lower confidence among Americans about future business and job conditions as well as suggesting a potential risk of recession.

The Conference Board Consumer Confidence Index fell for the third straight month in April. The Present Situation Index, which measures consumers’ assessment of current business and labor market conditions, also declined. The Expectations Index, measuring consumers’ short-term outlook for income, business, and labor market conditions, decreased to 66.4. An Expectations Index reading less than 80 often signals a potential recession. “Confidence retreated further in April, reaching its lowest level since July 2022,” said Dana M. Peterson, chief economist at The Conference Board.

In April, confidence declined among almost all income groups except for those in the $25,000 to $49,999 bracket. Households with incomes less than $25,000 and those with greater than $75,000 reported the biggest drops in confidence.

In terms of age, confidence fell among all age groups. However, consumers under the age of 35 had higher confidence than those older.

“Elevated price levels, especially for food and gas, dominated consumer’s concerns, with politics and global conflicts as distant runners-up. Average 12-month inflation expectations remained stable at 5.3 percent despite concerns about food and energy prices,” Ms. Peterson said. “Consumers’ Perceived Likelihood of a US Recession over the Next 12 Months rose slightly in April but is still well below the May 2023 peak.”

People were also less optimistic about their family’s financial situation over the next six months.

A greater share of consumers expect interest rates to be higher over the year. Consumer intent to buy homes and big appliances—variables sensitive to interest rates—over a period of six months softened. Plans for taking a vacation fell to the lowest level since June 2023.

When consumers were asked about items they would cut spending on to save money, discretionary purchases ranked at the top, including clothing/fashion, eating away from home, vacations, and entertainment away from home. Fewer consumers said they would cut back on non-discretionary items like education, childcare, and healthcare.

A recent Gallup poll found that U.S. economic confidence fell in April, the first decline in seven months. “When asked about the economy’s direction, 29 percent of Americans, down from 33 percent in March, say conditions are getting better, while 67 percent (up from 63 percent) say they’re getting worse.”

“Republicans have had a predominantly negative view of the economy during Biden’s presidency, and their assessments of the economy have dipped further this April,” Gallup said. In contrast, Democrats were more optimistic about the economy.

US Recession Risk

The American economy showed signs of slowing down in Q1 as GDP eased to 1.6 percent, a lower rate of growth compared to 3.4 percent in Q4, 2023. The Q1 GDP also fell short of estimates of 2.5 percent growth.

In an April 8 letter to shareholders, JP Morgan Chase CEO Jamie Dimon, asked people to “beware of higher rates and recession—not just for banks but for the whole economy.”

“We may be entering one of the most treacherous geopolitical eras since World War II. And I have written in the past about high levels of debt, fiscal stimulus, ongoing deficit spending, and the unknown effects of quantitative tightening,” he wrote.

“The impacts of these geopolitical and economic forces are large and somewhat unprecedented; they may not be fully understood until they have completely played out over multiple years.”

If long-end rates—yields that are 10 years or greater—go up over six percent and the increase is accompanied by a recession, “there will be plenty of stress—not just in the banking system but with leveraged companies and others,” Mr. Dimon said.

According to a recent poll of economists earlier this month by Bankrate, the odds of the U.S. economy entering a recession over the next 12 months is 33 percent.

“The probability of recession remains elevated and will stay that way as long as Fed monetary policy remains in restrictive territory. Even so, the risk has diminished in recent months on the resilience of the economic and financial data,” said Scott Anderson, the chief U.S. economist at BMO Capital Markets.

Mike Englund, chief economist at Action Economics, pointed out that the American economy “will be increasingly at risk of a downside shock, as the expansion matures and as the stimulative effect of prior fiscal policy wears off.”

In a December 2023 report, Fitch Ratings predicted global growth to fall sharply in 2024 but noted that the United States will avoid a recession.

An April 26 report by the U.S. Bank said it was unclear whether the American economy can continue maintaining its momentum.

“A big question that may drive the markets and the timing of Fed rate cuts is whether consumers can continue spending at a sufficient pace to keep the economy growing,” said Rob Haworth, senior investment strategy director at U.S. Bank Wealth Management.

“If rates stay elevated or move higher and companies are forced to issue debt with more significant financing costs, that could dampen business activity and threaten current expectations for economic growth.”