The leading economic index fell 0.4% in July, marking its 16th consecutive monthly decline. However, other economic indicators suggest that a recession is not imminent.
Economists surveyed by the Wall Street Journal had predicted a 0.4% decrease in the leading index.
The leading index consists of 10 indicators that gauge the direction of the economy. Historically, an extensive losing streak in this index has preceded a recession.
Despite the decline in the leading index, the economy has continued to grow. In fact, the third quarter is projected to experience particularly strong growth, with the possibility of a 5% or higher increase in gross domestic product (GDP).
Key Details
Contrary to the leading index, the coincident index, which measures current conditions, actually rose 0.4% in July. This index provides a more accurate representation of the current state of the economy.
Justyna Zabinska-La Monica, senior manager of business cycle indicators at the Conference Board, acknowledged that the coincident index suggests that we are still in a favorable growth environment.
The lagging index, on the other hand, remained unchanged last month. This index provides a retrospective view of the economy.
Big Picture
While many economists have adjusted their predictions for a recession and pushed back the expected timeline to next year, the Conference Board has maintained its stance.
According to the board’s forecast, a relatively brief and mild recession will begin towards the end of 2023 and extend until early next year.
However, the resilience shown by the economy raises doubts about the accuracy of the leading indicator as it has been in the past.
Nonetheless, there are lingering risks for the U.S. economy. The rapid increase in interest rates over the past year, driven by the Federal Reserve’s efforts to combat high inflation, has the potential to slow down economic growth due to higher borrowing costs.
Should the Federal Reserve proceed with further rate hikes, it could pose a greater risk to the economy.
Market Reaction
In Thursday’s trading, both the Dow Jones Industrial Average (DJIA) and the S&P 500 (SPX) experienced gains.
