A closely watched gauge of the US economy fell more than expected last month, adding to fears that the US is heading towards recession. The Conference Board’s Leading Economic Index (LEI) dropped in December, more than forecast and down to the lowest level since the early days of the pandemic in May 2020. From June to December 2022, the LEI slid 4.2%, more than double the decline of the previous six-month period.
Should we be concerned?
The continuing sharp decline in the LEI signals recession, and that overall US economic activity is likely to turn negative in coming quarters (before potentially picking up again in the fourth quarter of 2023). The same signal is being picked up through the shape of the yield curve, with inversion typically followed by recession some quarters later. Indicators point to deteriorating conditions for labour markets, manufacturing, housing sales, and construction.
Yes, we should be concerned. But we shouldn’t be overwhelmed by bad economic news. Markets are forward-looking and have likely already incorporated these indicators. Rather, it is the shift in the narrative that tends to move markets, and the unexpected that creates volatility. Plus, there is a natural “balancing factor” that ameliorates the impact of bad economic news: a weak economy reduces inflationary pressures, allowing interest rates to fall, and thereby providing a positive injection into the economy. Sometimes bad news for the economy can be good news for markets.
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