Summary: Conference Board leading index down 0.4% in August, in line with expectations; possible recession over next year; regression analysis implies 1.8% contraction in year to November.
The Conference Board Leading Economic Index (LEI) is a composite index composed of ten sub-indices which are thought to be sensitive to changes in the US economy. The Conference Board describes it as an index which attempts to signal growth peaks and troughs; turning points in the index have historically occurred prior to changes in aggregate economic activity. Readings from March and April of 2020 signalled “a deep US recession” while subsequent readings indicated the US economy would recover rapidly. More recent readings have implied US GDP growth rates will turn negative sometime in 2023.
The latest reading of the LEI indicates it decreased by 0.4% in August. The result was in line with expectations but less than July’s -0.3%.
“With August’s decline, the US Leading Economic Index has now fallen for nearly a year and a half straight, indicating the economy is heading into a challenging growth period and possible recession over the next year,” said Justyna Zabinska-La Monica of The Conference Board.
Short-term US Treasury bond yields declined on the day while longer-term yields rose substantially. By the close of business, the 2-year Treasury yield had lost 2bps to 5.15%, the 10-year yield had gained 10bps to 4.50% while the 30-year yield finished 14bps higher at 4.58%.
In terms of US Fed policy, expectations of a lower federal funds rate in the first half of 2024 softened. At the close of business, contracts implied the effective federal funds rate would average 5.33% in September, in line with the current spot rate, 5.40% in November and 5.435% in December. September 2024 contracts implied 5.075%, 25bps less than the current rate.
The Conference Board currently forecasts GDP growth of 2.2% in 2023 but just 0.8% in 2024. Regression analysis suggests the latest reading implies a -1.8% year-on-year growth rate in November, down from the -1.7% implied by the previous month’s LEI.
