By Tom Ozimek
The recessionary drums are beating louder as a key U.S. economic gauge from The Conference Board dropped for the 18th consecutive month as the Federal Reserve’s rate hikes in response to soaring inflation are taking their toll on the economy.
The Leading Economic Index (LEI), which is a forward-looking gauge made up of 10 individual indicators, fell by 0.7 percent in August, The Conference Board said on Oct. 19.
The latest reading is worse than August’s 0.5 percent decline and brings the total six-month drop to 3.4 percent in the LEI measure, which is designed to predict business cycle shifts, including recessions.
All but one of the LEI’s 10 individual indicators were negative last month.
“In September, negative or flat contributions from nine of the index’s 10 components more than offset fewer initial claims for unemployment insurance,” Justyna Zabinska-La Monica, senior manager, Business Cycle Indicators, at The Conference Board, said in a statement.
The labor market has remained tight despite the fact that the Federal Reserve has been cooling the economy by hiking interest rates at its fastest pace since the 1980s in a desperate bid to quash high prices.
Last week, the number of Americans filing new claims for unemployment fell to a nine-month low, indicating that companies are reluctant to let workers go despite the presence of economic headwinds.
“Companies on earnings calls may warn about the outlook and risks ahead, but they are still holding on tight to their workers as good help is increasingly hard to find,” Christopher Rupkey, chief economist at FWDBONDS in New York, told Reuters.
Commenting on The Conference Board’s latest downbeat economic signals, Ms. Zabinska-La Monica warned of the “risk of economic weakness ahead” as the U.S. economy struggles to maintain momentum.
“So far, the U.S. economy has shown considerable resilience despite pressures from rising interest rates and high inflation,” she said. “Nonetheless, The Conference Board forecasts that this trend will not be sustained for much longer, and a shallow recession is likely in the first half of 2024.”
Many economists see a relatively high probability of a recession in the coming year, with signals like waning consumer confidence an often-cited canary in the coal mine.
Further Fed interest-rate hikes are also potentially on the horizon, as Federal Reserve Chair Jerome Powell told a conference on Oct. 19 that inflation remains stubbornly high and that bringing it down to the central bank’s target of around 2 percent will likely require a slowdown in the economy and job market.
Waning Consumer Strength
With persistently high inflation and a deteriorating economic outlook, September saw consumer confidence fall for the second consecutive month to hit a four-month low, according to The Conference Board.
Expectations about the economic outlook over the next six months also dropped below The Conference Board’s recession threshold of 80, reflecting waning confidence about business conditions, job availability, and earnings.
“Write-in responses showed that consumers continued to be preoccupied with rising prices in general, and for groceries and gasoline in particular. Consumers also expressed concerns about the political situation and higher interest rates,” Dana Peterson, chief economist at The Conference Board, said in a statement.
All that consumer worry is translating into reduced consumption, a big red flag as consumer spending is a key driver of the U.S. economy, accounting for a whopping two-thirds of gross domestic product (GDP).
The latest consumer spending date are for August, which reveal the Personal Consumption Expenditures (PCE) Index growing 0.4 percent that month, less than half of July’s pace of 0.9 percent.
A recent survey carried out in September by CNBC-Morning Consult found that 92 percent of U.S. adults have cut back on spending over the past six months.
Looking forward, over three-quarters of those polled said they plan to cut back on spending for non-essential items.
Former Walmart CEO Bill Simon said in an interview on CNBC recently that a series of factors—political polarization, inflation, and high interest rates—were all working together to undermine consumers and their propensity to spend.
“That sort of pileup wears on the consumer and makes them wary,” Mr. Simon told the outlet. “For the first time in a long time, there’s a reason for the consumer to pause.”
Mr. Simon said that after a long period of cheap money cut short by the Federal Reserve’s rapid rate hikes in response to soaring inflation, consumers are now beginning to buckle.
“Consumers had an incredible 10-, 12-year run,” he told CNBC’s “Fast Money” program. “Markets were buoyant. Interest rates were low. Money was available.”
But with interest rates currently within the range of 5.25–5.5 percent, the era of cheap money has come to an end—and economic stresses are beginning to emerge.
The U.S. housing market, for example, is beginning to creak under the strain of high mortgage rates, which recently touched 8 percent.
Housing Market Strain
With rates now rising to 8 percent, the mortgage demand slump has deepened despite an underlying demand for affordable housing.
Two years ago, mortgage rates were hovering around 3 percent, with the sharp run-up having a dampening effect on loan demand.
The Mortgage Bankers Association (MBA) said on Oct. 18 that mortgage application demand has plunged for the sixth consecutive week, to the lowest level since 1995.
“Both purchase and refinance applications declined, driven by larger drops for conventional applications,” said Joel Kan, MBA’s deputy chief economist.
“Purchase applications were 21 percent lower than the same week last year, as homebuying activity continues to pull back given reduced purchasing power from higher rates and the ongoing lack of available inventory,” he added.
With home loan-borrowing costs at multi-decade highs and many potential home sellers having locked in their mortgages at much lower rates, there are dual disincentives pushing down sales volumes.
Faced with a drop in mortgage demand, several housing-industry lobby groups have urged Mr. Powell not to raise interest rates any further.