By Tom Ozimek
America’s recessionary drums beat louder in August as a key economic gauge from the Conference Board dropped for the sixth month in a row, with a “major driver” being the Fed’s aggressive rate hikes.
The Leading Economic Index (LEI) for the United States, which is a forward-looking gauge made up of 10 individual indicators, fell by 0.3 percent in August, the Conference Board said on Sept. 22. The latest reading brings the total six-month drop to 2.7 percent in the LEI measure, which is designed to predict business cycle shifts including recessions.
“The US LEI declined for a sixth consecutive month potentially signaling a recession,” said Ataman Ozyildirim, senior director for economics at the Conference Board, in a statement.
While the U.S. economy met the common rule-of-thumb definition for a recession when GDP printed negative for two quarters in a row earlier this year, recessions are formally called by a panel of economists at the National Bureau of Economic Research (NBER). They use a broader definition than the two-quarter rule, relying on a wide range of indicators, including the labor market, which has remained on a relatively solid footing.
There are signs, however, that the tight labor market is starting to loosen.
Softening Job Market
The most recent U.S. government jobs report showed moderate wage growth and a rise in the unemployment rate to 3.7 percent in August from 3.5 percent in July. At the same time, the average workweek dipped to 34.5 hours in August from 34.6 hours in July.
“Among the index’s components, only initial unemployment claims and the yield spread contributed positively over the last six months—and the contribution of the yield spread has narrowed recently,” Ozyildirim said.
Initial jobless claims, which are a proxy for layoffs, have trended at roughly pre-pandemic levels for the past six months. Weekly initial filings were 198,000 for the week ended March 5, with a recent peak of 261,000 for the week ended July 16, according to data compiled by the St. Louis Fed. The most recent data for first-time unemployment claims showed 213,000 filings for the week ended Sept. 17.
Ozyildirim added that U.S. labor market strength is expected to continue to soften in the coming months.
“The average workweek in manufacturing contracted in four of the last six months—a notable sign, as firms reduce hours before reducing their workforce,” he said.
Fed Tightening a ‘Major Driver’ of Slowdown
The Conference Board expects U.S. economic activity to continue slowing, with the organization predicting the economy will fall into a recession at some point in the coming quarters.
“A major driver of this slowdown has been the Federal Reserve’s rapid tightening of monetary policy to counter inflationary pressures,” Ozyildirim said.
Federal Reserve Chair Jerome Powell sent a stark message following the central bank’s recent decision to hike rates by another 75 basis points. Powell told reporters that there’s no “painless” way to bring down inflation and warned there could be more than just a “relatively modest” rise in unemployment as the Fed keeps tightening monetary policy to dent demand.
The central bank chief made the remarks in a press conference on Sept. 21, which came after a decision by the Federal Open Market Committee to deliver another jumbo rate hike, bringing the benchmark lending rate to a range between 3.00–3.25 percent.
Powell said that inflation was “running too high” and warned that rates are heading higher and poised to stay at a restrictive level for “some time.”
Citing persistently high inflation, the Organisation for Economic Co-operation and Development (OECD) on Sept. 26 downgraded U.S. economic growth forecasts for 2022 by one whole percentage point from prior projections. The OECD now expects America’s economy to expand by 1.5 percent this year. Next year’s U.S. growth forecast was cut by 0.7 percentage points to a paltry 0.5 percent.