Evening Brief – 05.18.23

Leading Economic Indicators (LEI) from the Conference Board released Thursday decreased 0.6% month over month in April, continuing their downtrend. This is the 13th consecutive monthly decline – the longest streak since the Lehman bankruptcy, which saw 22 straight months of declines from June 2007 to April 2008.

The LEI is at its lowest point since December 2017, outside of COVID, and on a year-over-year basis it is down 8.09%, which is almost as much as its biggest year-over-year drop since 2008, outside of the COVID lockdown. Despite calls for a “soft landing,” this index is not showing any signs of recovery. The trajectory of the LEIs continues to signal recession.

Using the Treasury spread (the difference between the 10-year and 3-month yield), the Federal Reserve’s model projects a 68% chance of recession over the next 12 months, a level not often seen outside of recessionary periods. The popular 2s/10s yield spread also predicts recession.

Yet, despite the Fed’s strong tightening campaign, the Financial Conditions Index and Credit Survey from the Chicago Fed indicate monetary policy is still deemed to be relatively “easy.” The US has never experienced a recession without the index first signaling “restrictive” policy, or a reading over zero. Currently, the index is -0.26, but a more restrictive policy is not completely off the table.

Although Fed Chair Jerome Powell has hinted at a rate-hike pause, other Fed officials have voiced slightly different opinions in recent days. Atlanta Fed President Raphael Bostic said policymakers won’t be thinking about rate cuts “until well into 2024.” But he also said he would be inclined to continue raising rates into a recession.

Meanwhile, consumer default rates are still at or below pre-pandemic levels, although having recovered greatly from their lows. But given the rising levels of consumer debt, especially the record-high total revolving credit balances of $1.24tn, these developments are worrisome.

The labor market has remained resilient, which is good news, though any increase in unemployment claims should be closely examined given that the unemployment rate is once again close to record lows; inflation is stabilizing; the S&P 500 is leaning toward recession, but earnings have generally outperformed expectations; and credit spreads are not yet bellowing recession.

It is clear there are multiple crosscurrents at play, and only time will tell whether we have a severe recession, a mild recession, or no recession.