The recessionary drums are beating louder as a key U.S. economic gauge from the Conference Board dropped for the 17th consecutive month, with a major factor being the Federal Reserve’s aggressive rate hikes.
“With August’s decline, the US Leading Economic Index has now fallen for nearly a year and a half straight, indicating the economy is heading into a challenging growth period and possible recession over the next year,” Justyna Zabinska-La Monica, senior manager, Business Cycle Indicators, at The Conference Board, said in a statement.
She said that the leading index was negatively impacted by weak new orders, deteriorating consumer expectations for future business conditions, tighter credit conditions, and the Federal Reserve’s aggressive rate hikes.
“All these factors suggest that going forward economic activity probably will decelerate and experience a brief but mild contraction,” she said.
Double-Dip Recession?
The country has been on recession watch for some time, with some analysts arguing that America fell into a recession last year—and is due for another one.
The first two quarters of 2022 saw America’s economic output contract at a 1.6 percent annual rate in the January-March quarter and at a 0.6 percent annual rate from April through June.
By one common definition of recession (two consecutive quarters of negative growth), that would mean the United States fell into a downturn.
A double-dip recession is where a downturn is followed by a brief gasp of recovery—before turning negative and once again falling into a recessionary zone.
“We’ve never had indicators like that, for this long, without the economy being in recession. Period,” Mr. Shedlock said when asked for comment on the latest leading economic indicators from The Conference Board, adding that he believes many economists see the writing on the wall pointing to a contraction but “they’re afraid to say it right now.”
“Around recessions, gross domestic income is often the far better of the two measures,” he said.
The Philly Fed’s numbers, which show quarter-over-quarter rates of growth, indicate that GDI was negative for the fourth quarter of 2022 ( minus 3.4 percent) and the first quarter of 2023 (minus 1.8 percent), before turning positive (0.5 percent) in the second quarter of 2023.
When examining the Philly Fed’s numbers and other data, Mr. Shedlock said he sees another recession ahead.
‘A Crash Is Underway’
Data from the housing market, traditionally one of the last to turn over in a recession, has also flashed warning signs.At the same time, the median existing-home sales price climbed 3.9 percent from one year ago to $407,100, which is the third consecutive month of prices breaking above $400,000.
Commenting on the sharp decline in transactions without a corresponding collapse in house prices, Mr. Shedlock said it’s an unusual dynamic and blamed the Fed’s easy money policies for introducing market distortions.
“I’ve never seen one before where we’ve had a transaction crash without a price crash,” he said. “But this is what the Fed has produced.”
He expects the situation to stay that way as long as the Fed keeps interest rates high. Mr. Shedlock blamed the Fed for ignoring obvious inflation signals and keeping its foot on the monetary gas pedal by continuing with its asset-buying program known as quantitative easing—and by keeping interest rates at near zero for too long.
The Fed overlooked building pressure in house prices in part because the standard measure of inflation, the Consumer Price Index (CPI), doesn’t directly capture home prices but uses rent and something called owners’ equivalent rent, which is what people who own their home would pay if they had to rent it.
“So ignoring all that was ignoring inflation,” he said, adding that when the pandemic hit, the Fed ignored all the bubbles its free-wheeling monetary policies created and slashed interest rates.
“It’s a dilemma the Fed has made,” he said.
“Despite denials in many corners, a crash is underway,” he wrote.
At the same time, Fed officials left the door open for one more rate increase before the end of the year and indicated smaller rate cuts in 2024.
FOMC members noted that U.S. economic activity had been growing at a “solid pace” and that “inflation remains elevated.”
