Summary: Conference Board leading index down 0.8% in June, lower than expected; growth “likely to slow further”, “recession risks grow”; recession around end of this year, early next “now likely”; latest reading implies 2.0% US GDP growth to September.
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 generally implied lower US GDP growth rates.
The latest reading of the LEI indicates it decreased by 0.8% in June. The result was lower than the 0.6% fall which had been generally expected as May’s revised figure of -0.6% after it was revised down from -0.4%.
“The US LEI declined for a fourth consecutive month suggesting economic growth is likely to slow further in the near-term as recession risks grow,” said Ataman Ozyildirim, Senior Director of Economic Research at The Conference Board.
US Treasury bond yields moved considerably lower on the day. By the close of business, the 2-year Treasury yield had shed 13bps to 3.10%, the 10-year yield had lost 15bps to 2.88% while the 30-year yield finished 12bps lower at 3.04%.
In terms of US Fed policy, expectations of a higher federal funds range over the next 12 months softened. July contracts implied an effective federal funds rate of 1.6825%, 10bps higher than the current spot rate. September contracts implied a rate of 2.555% while July 2023 futures contracts implied an effective federal funds rate of 3.195%, 160bps above the spot rate.
Ozyildirim attributed the fall in the index to consumer pessimism, softening labour market conditions, falling share prices and fewer new orders in the manufacturing sector. He also expects US economic conditions to worsen. “Amid high inflation and rapidly tightening monetary policy, The Conference Board expects economic growth will continue to cool throughout 2022. A US recession around the end of this year and early next is now likely.
The Conference Board now expects US GDP growth of 1.7% in 2022, down from 2.3%. Regression analysis suggests the latest reading implies a 2.0% year-on-year growth rate in September, down from August’s revised figure of 2.6%.
