Recession Signals Get Louder as Key Economic Gauge Drops for Eighth Straight Month

The Federal Reserve building in Washington, D.C.. (MDart10/Shutterstock/File Photo)

The possibility that the United States might slip into a recession has strengthened with the Conference Board Leading Economic Index (LEI) remaining in the red in October.

The LEI fell by 0.8 percent last month, to 114.9, after falling by 0.5 percent in September, according to a press release on Nov. 18. During the six-month period between April and October, the LEI declined by 3.2 percent, which is a reversal from its 0.5 percent growth seen in the previous six months.

Ataman Ozyildirim, senior director, economics, at The Conference Board, pointed out that the LEI has fallen for the eighth consecutive month, suggesting that the American economy is likely in a recession.

“The downturn in the LEI reflects consumers’ worsening outlook amid high inflation and rising interest rates, as well as declining prospects for housing construction and manufacturing,” he said.

“The Conference Board forecasts real GDP growth will be 1.8 percent year over year in 2022, and a recession is likely to start around year-end and last through mid-2023.”

Most LEI components declined in October, with non-financial components and average consumer expectations for business conditions declining by 1.74 percent and 2.8 percent, respectively.

The Treasury yield curve is also flashing warning signals. When longer-term interest rates like the 10-year yield get lower than their short-term counterparts like the two-year yield, it results in an inverted yield curve, which usually has been an indicator of a future recession, although it is not definite.

At present, the yield curve has become inverted—in fact, much more inverted than during the period leading up to either the recession of 2001 or 2008, according to an analysis at Bloomberg.

Recession Warning

While speaking at an investment panel in Riyadh last month, Goldman Sachs CEO David Solomon predicted economic conditions to tighten and that the Federal. Reserve will keep raising interest rates until the range hits 4.5–4.75 percent before pausing.

But if the Fed does not see “real changes,” Solomon expects rates to go up further. “And I think generally when you find yourself in an economic scenario like this where inflation is embedded, it is very hard to get out of it without a real economic slowdown,” he said, according to CNBC.

A Nov. 18 report by Goldman Sachs is predicting a soft landing for the United States next year, avoiding a recession by a narrow margin. Thirty-five percent of economists at the firm, however, see a potential U.S. recession over the next year.

Analysts at S&P Global have warned that the rate of corporate default in the United States could hit 3.75 percent by September next year if the Fed’s hawkish policy triggers a mild or shallow economic downturn.

However, if a serious downturn were to materialize, the default rates could climb to 6 percent, which would be the highest level since March last year.