US may fall into recession in Q3 this year
Over the past few days, we have heard about how the probability of a recession in the US is falling. However, an index designed to understand where an economy is heading in the near term suggests otherwise. The Leading Economic Index (LEI) which tracks significant turning points in the US business cycle fell for the 15th consecutive month, suggesting the possibility of a recession.
Why does this story matter?
Multiple economists have warned about a recession in the US since the Federal Reserve started hiking interest rates. However, contrary to expectations, the country somehow evaded a chronic economic downturn. Recently, Goldman Sachs said the chances of a US recession next year are only 20%. The falling LEI, however, suggests that the US is still not out of trouble.
LEI fell by 0.7% in June
The Conference Board, a non-profit business research organization, publishes the LEI. It said the LEI fell 0.7% in June to 106.1. Economists had predicted a 0.6% fall. In May, it had fallen 0.6%. From December 2022 to June 2023, the index declined by 4.2%. It is much more than the 3.8% contraction from June to December 2022.
What are the reasons behind LEI's fall?
The acceleration in LEI contraction is worrying. The Conference Board attributed the continuous fall to a gloomier consumer outlook, increased unemployment claims, weaker new orders, and a fall in housing construction. Tight monetary policy, decrease in government spending, inflation, and harder-to-get credit will affect economic growth further, said Justyna Zabinska-La Monica, senior manager of business cycle indicators at The Conference Board.
Recession could hit US from Q3 2023-Q1 2024
"Taken together, June's data suggests economic activity will continue to decelerate in the months ahead," Zabinska-La Monica said. According to her, the US economy is likely to be in recession from Q3 of this year to Q1 of next year. The 15-month decline in LEI is the longest losing streak since 2007-2008, during the lead-up to the Great Recession.
Timely moves by corporations delayed a US recession
Even if The Conference Board is right, it would still be a delayed recession. Many economists expected the US to be in recession now. According to Société Générale, the predicted recession hasn't arrived in the US due to "something very strange." The bank attributed it to some great moves by corporations, including refinancing their liabilities into long-term, low-rate, fixed debt.
