Apr 26, 2023

Up or Down – Which Way From Here

Weekly Market Commentary

Economic sentiment can shift on a dime. This year, terms like ‘soft landing (slowing growth, slowing inflation)’ and ‘hard landing (recession, slower inflation)’ have gotten the most play.

Earlier in the year, a so-called ‘no-landing’ scenario (continued economic growth, high inflation) crept into the vocabulary. Occasionally, we hear ‘crash landing (steep recession, low inflation).’

Historically, economists have done a lousy job forecasting recessions. Economic forecasting models are complex. However, the many variables that are intertwined don’t always neatly spit out an accurate forecast.

One tool published monthly by the Conference Board is called the Leading Economic Index (LEI). It is a compilation of ten economic reports that tend to lead economic activity. For example, a big rise in layoffs would suggest a recession is looming. Or, tighter credit conditions, which create added hurdles to obtain loans, could foreshadow weaker conditions.

The advantage of the LEI is that it is made of ten reports, reducing the odds of a false signal from one or two leading economic indicators.

In March, the LEI fell a steep 1.2%, which is the 12th-straight monthly decline. According to the Conference Board, the rate of decline has accelerated over the last six months. But the index has historically done a poor job of forecasting the start date of a recession.

Currently, the Conference Board believes a recession could start in the middle of the year. Last fall, however, it expected a recession could begin by the end of 2022.

A recession has ensued anywhere from one month after the LEI peaked (1960) to 20 months (2008). That’s a wide margin. Average start time: 10 months, which encompasses 9 recessions since 1960. A recession has not started without the LEI peaking first.

But the LEI has also experienced shallow declines without an ensuing recession. Today’s decline surpasses the threshold of a shallow decline.

“Leading indicators data are now fully consistent with a recession,” Bespoke, a leading research group, said last week.

But it adds a caveat, too. “That doesn’t make a recession inevitable, but either this indicator is getting less reliable or that’s what we’re going to get.”

Muddying the Outlook

The LEI is designed to foreshadow general economic trends, not forecast a recession’s length or speed of an economic recovery.

Job growth remains strong, while job openings, which have come down, remain quite elevated in some industries. Companies in some industries may simply choose to axe job openings, not jobs.

Further, consumers still have cash in the bank from prior stimulus checks and generous jobless benefits.

Given recent market action, we have yet to see investors decisively conclude a recession is inevitable this year amid today’s economic crosscurrents.

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