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Leading Indicators Fall Again in February, Signaling Recession on the Horizon

The Conference Board’s index of leading indicators, a widely followed gauge of future economic activity, fell in February by 0.3%, the 11th consecutive monthly decline.

The index is now down 3.6% over the past six months following a 3% drop in the prior six months.

“The LEI for the US fell again in February, marking its eleventh consecutive monthly decline,” said Justyna Zabinska-La Monica, senior manager, business cycle indicators, at the business organization. “Negative or flat contributions from eight of the index’s ten components more than offset improving stock prices and a better-than-expected reading for residential building permits.”

“While the rate of month-over-month declines in the LEI have moderated in recent months, the leading economic index still points to risk of recession in the US economy,” Zabinska-LaMonica added. “The most recent financial turmoil in the US banking sector is not reflected in the LEI data but could have a negative impact on the outlook if it persists. Overall, The Conference Board forecasts rising interest rates paired with declining consumer spending will most likely push the US economy into recession in the near term.”

The US is currently facing a banking crisis after three banks failed and the government stepped in on Sunday with a rescue plan to guarantee that depositors will have access to their money. But within the last week, banks have borrowed or otherwise gained the benefit of $300 billion in assistance from the Federal Reserve, a sign that the problems may be more widespread than a few individual banks.

Political Cartoons on the Economy

“Our clients are concerned about the safety of their money right now,” says Tony Welch, chief investment officer at SignatureFD, an Atlanta financial advisory firm. “You never know what it is that will break the camel’s back.”

At the same time, the crisis has called into question the Fed’s plan to continue hiking interest rates to battle inflation. The central bank meets next week and consensus now calls for a modest hike in rates of 25 basis points or even a pause where estimates had forecast a 50 basis point hike as recently as a week ago.

“Bringing inflation down was never going to be easy and we were going to see an economic slowdown associated with that course,” Vanguard Chief Global Economist Joe Davis wrote Friday morning. “But as both an economist and as an investor, I would also underscore that having a more stable and manageable inflation rate is perhaps one of the most important long-term outcomes for all of us as investors.”

Observers say banks will be forced to tighten lending standards amid heightened scrutiny from regulators and that will be a further drag on an economy already fighting rising prices and higher interest rates.

“Our economists expect lending standards will tighten more, to a degree that’s greater than during the dot-com crisis, but less than during the financial crisis or the height of the pandemic,” Goldman Sachs said Thursday in the latest issue of its Briefings newsletter. . “Bank lending standards had already tightened significantly over the last few quarters to levels previously unseen outside of recessions, presumably because many bank risk divisions shared the recession fears that have been widespread in financial markets.”

“This is important because it means that lending standards started at a tight rather than a normal level, and as a result the incremental impact of a further tightening brought on by recent small bank stress might be more limited than it seems at first,” Goldman Sachs added.

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