Leading Indicators Fell Sharply in December in Start to Economic Week Featuring 4Q GDP and Inflation Data

A forward-looking gauge of economic activity fell sharply in December, showing the U.S. economy weakened markedly as the year ended, the Conference Board reported on Monday.

The business organization’s leading economic index fell 1% from November, when it dropped by 1.1%.

“The US LEI fell sharply again in December – continuing to signal recession for the US economy in the near term,” said Ataman Ozyildirim, senior director, economics, at the board. “There was widespread weakness among leading indicators in December, indicating deteriorating conditions for labor markets, manufacturing, housing construction, and financial markets in the months ahead.”

“Overall economic activity is likely to turn negative in the coming quarters before picking up again in the final quarter of 2023,” he added.

However, the American consumer has proven resilient amid the strain of higher borrowing costs and elevated prices for necessities. A drop in the price of gasoline from last summer’s peaks and continued improvement in the inflation data has some economists believing the Federal Reserve can pull off a “soft landing” where inflation recedes and the economy does not go into a recession.

The Fed meets next week to consider raising interest rates, with most experts calling for a quarter point increase following December’s 50-basis-point hike. That would be a slowing in the pace of increases and bring the Fed closer, in the minds of investors, to an end of its most aggressive monetary tightening in decades.

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Still, key Fed officials in recent days have emphasized that a reduction in the level of rate hikes does not suggest a pause or a pivot to cutting rates should the economy worsen.

Last week, weekly jobless claims dipped below 200,000 and other signs show the labor market is still strong despite widely publicized layoffs in the tech sector.

Reviewing recent earnings reports from the major banks that came out last week, BCA Research wrote on Monday morning that “Our overriding takeaway from this quarter’s calls is that households and businesses remain on solid footing.”

“Consumer delinquencies are only meandering back to their pre-pandemic levels, when the economy was ten-and-a-half years into its longest expansion on record; business non-performing loan and net charge-off ratios still hover at record lows; consumer deposit balances are still multiples of their pre-COVID levels and spending growth is still robust,” it added. “The CEOs’ and CFOs’ commentary was broadly consistent with last quarter’s and we interpreted it as confirmation of our view that the economic situation is not consistent with either an imminent or a severe recession.”

More data will come this week, including the first estimate of gross domestic product for the fourth quarter on Thursday. Consensus estimates call for a 2.7% increase, down from 3.2% in the third quarter but still quite healthy.

“On balance, the Q4 GDP data performance should show an economy that, while decelerating, remained resilient for the most part as 2022 came to an end,” Wells Fargo economists wrote on Sunday. “That said, the markets are likely to look through the Q4 GDP performance and place more weight on the recent deteriorating business survey evidence for signals of where the economy is going this year”

“Both the headline (Institute for Supply Management) manufacturing and services indices are now running in territory that is consistent with contracting GDP,” Wells Fargo added. “Next week we will receive the January ISM update where interest will be high for any indication of increased recession risk. Our updated outlook continues to expect U.S. GDP growth to slow and a mild recession to unfold in the second half of the year.”

On Friday, the personal consumption price expenditures index for December is released. This is an indicator closely watched by the Fed, especially the core rate excluding food and energy costs. Analysts are looking for the index to drop to an annual level of 5% from 5.5% in November, while the core falls to 4.4% from 4.7% earlier.

There will also be reports on new home sales on Thursday and pending home sales on Friday. As with other recent reports on the state of the housing market, these are expected to show further declines in activity.

Rounding out the week will be the final reading on consumer sentiment for January from the University of Michigan. Earlier readings of the survey showed their strongest levels in eight months on an improved outlook for inflation.

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