And there’s Still No Recession!
By Wolf Richter for WOLF STREET.
Every month, the Conference Board publishes its “Leading Economic Index” (LEI), which is a leading indicator for turning points in the business cycle and is designed to predict business-cycle recessions. It predicted the 2001 recession and the Great Recession. It didn’t predict the pandemic recession because that wasn’t a business-cycle recession but a pandemic with a lockdown that suddenly shut parts of the economy down; instead of predicting it, it reacted simultaneously with it, which is how it should have reacted. So its track record is good.
We here at WOLF STREET have been on recession watch since about mid-2022, and we’re still watching, and so this is fascinating and hilarious.
Today’s LEI predicts a recession in the “near term.”
“The Conference Board expects elevated inflation, high interest rates, and contracting consumer spending—due to depleting pandemic saving and mandatory student loan repayments—to tip the US economy into a very short recession,” said the report for October 2023, released today.
“The US LEI trajectory remained negative, and its six- and twelve-month growth rates also held in negative territory in October,” the report for October 2023 said.
“Among the leading indicators, deteriorating consumers’ expectations for business conditions, lower ISM® Index of New Orders, falling equities, and tighter credit conditions drove the index’s most recent decline,” the report for October 2023 said.
For the whole year of 2024, it forecasts “that real GDP will expand by just 0.8 percent.”
The 10 components of the LEI: Average weekly hours in manufacturing; Average weekly initial claims for unemployment insurance; Manufacturers’ new orders for consumer goods and materials; ISM® Index of New Orders; Manufacturers’ new orders for nondefense capital goods excluding aircraft orders; Building permits for new private housing units; S&P 500® Index of Stock Prices; Leading Credit Index™; Interest rate spread (10-year Treasury bonds less federal funds rate); Average consumer expectations for business conditions.
But the LEI predicted a recession for late-2022, early 2023, mid-2023, and late-2023.
Recession to start late 2022 or early 2023, first outlined in the report for August 2022. “The US LEI declined for a sixth consecutive month potentially signaling a recession,” it said in the report for August 2022. And it added: “Economic activity will continue slowing more broadly throughout the US economy and is likely to contract.” And, “The Conference Board projects a recession in the coming quarters.”
After the report for August 2022, there came a litany of monthly recession predictions that moved the coming recession from late 2022 across all of 2023 to finally 2024. For example:
Recession to start at the beginning of 2023: In the report for November 2022, it said, “As a result [of this parade of horribles], we project a US recession is likely to start around the beginning of 2023 and last through mid-year.”
Recession to start in early 2023: In the report for December 2022, it said, “The US LEI fell sharply again in December—continuing to signal recession for the US economy in the near term.” And it added: “Overall economic activity is likely to turn negative in the coming quarters before picking up again in the final quarter of 2023.”
Recession to start in mid-2023: In the report for March 2023, it said, “The U.S. LEI fell to its lowest level since November of 2020, consistent with worsening economic conditions ahead,” it said. “The weaknesses among the index’s components were widespread in March and have been so over the past six months,” it said. And “economic weakness will intensify and spread more widely throughout the US economy over the coming months, leading to a recession starting in mid-2023.”
Recession to start in Q3 2023: In the report for May 2023, it said, “the US economy will contract over the Q3 2023 to Q1 2024 period. The recession likely will be due to continued tightness in monetary policy and lower government spending.”
That last reason for a recession to start in Q3 – “lower government spending” – tickled my funny bone.
Recession to start in Q4 2023: In the report for July 2023, it said, “The Conference Board now forecasts a short and shallow recession in the Q4 2023 to Q1 2024 timespan.”
And there’s still no recession.
None of these recessions that were forecast to ply the land since late 2022 have actually occurred. On the contrary, “Real” GDP” (GDP adjusted for inflation) jumped by an annualized rate of 4.9% in Q3 from Q2, following the 2.1% increase in Q2 and the 2.2% increase in Q1.
Obviously, as I said when the red-hot GDP data was released, “as we can see from the chart, big increases are generally followed by smaller increases, or sometimes quarter-to-quarter dips. And that history of quarter-to-quarter changes alone, without knowing anything about Q4 yet, would lead us to expect a smaller increase in Q4. That doesn’t mean the economy suddenly hit an air pocket, but that growth reverts to trend.”
The predicted recession-Q3 turned out to be one heck of a good quarter, even if future revisions knock off a few chunks of the 4.9% growth. And if Q4 growth comes in at 1% or 2% (2% growth is roughly the longer-run average of the US economy), we’ll still condemned to wait for that recession.
We will get a business-cycle recession eventually because there always is a business-cycle recession eventually because it’s part of the business cycle. The question is when.
Why predictive models that used to work well are failing spectacularly with their recession predictions in this crazy economy will be the topic of a future brainstorming article here when I can wrap my brains halfway around it.
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