Economic index falls for ninth straight month, flashing recession warning

An often-overlooked economic gauge signaled on Thursday that the U.S. economy is headed for a recession – or already in one – as the Federal Reserve fights inflation with a series of aggressive interest rate hikes. 

The Conference Board’s Leading Economic Indicators index showed that conditions further deteriorated in November with the gauge down 1% from the previous month. That follows a 0.9% decline in September.

"The U.S. LEI fell sharply in November, continuing the slide it's been on for most of 2022 after peaking in February," said Ataman Ozyildirim, the senior director of economics at the Conference Board. "Only stock prices contributed positively to the LEI in November. Labor market, manufacturing, and housing indicators all weakened—reflecting serious headwinds to economic growth."

The slump reflects a worsening outlook among consumers, who are increasingly worried about steeper interest rates and stubbornly high inflation, as well as a prolonged slump in the housing market. 

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There is a growing expectation on Wall Street that the Fed will trigger an economic downturn as it raises interest rates at the fastest pace in three decades to catch up with runaway inflation. 

Officials this month approved a seventh consecutive interest rate hike, lifting the federal funds rate to a range of 4.25% to 4.5% – well into restrictive levels – and indicated they plan to continue raising rates in the early months of 2023. 

But in a troubling development, the Fed's rate hikes have so far failed to tame inflation: The government reported this month that the consumer price index soared 7.1% in November from the previous year, about three times the pre-pandemic average.

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That suggests the Fed will have to continue charting its aggressive course, raising the odds that it will crush consumer demand and cause unemployment to rise.

Hiking interest rates tends to create higher rates on consumer and business loans, which slows the economy by forcing employers to cut back on spending.

Officials also indicated that economic growth will slow sharply next year and that unemployment will march substantially higher to a rate of 4.6% as rate hikes bring the U.S. to the brink of a recession. The Fed expects the jobless rate to remain elevated in 2024 and 2025 as steeper rates continue to take their toll by pushing up borrowing costs. 

That could mean roughly 1.7 million Americans lose their jobs.

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Although Fed Chair Jerome Powell has acknowledged the difficulty of avoiding a recession, he has also pushed back against the certainty of a downturn, suggesting that lower inflation prints in October and November could boost the odds of a soft landing the sweet spot between curbing inflation without flatlining growth. 

"To the extent we need to keep rates higher and keep them there for longer and inflation moves up higher and higher, I think that narrows the runway," Powell told reporters. "But lower inflation readings, if they persist, in time could certainly make it more possible. I don't think anyone knows whether we're going to have a recession or not, and if we do, whether it's going to be a deep one or not. It's not knowable."