U.S. Leading Economic Indicators Continue to Fall, No Longer Signal Recession

As a seasoned analyst with a fair share of market cycles under my belt, I find the recent data from The Conference Board to be a breath of fresh air amidst the pervasive fear of a looming recession. While the economy is still showing signs of slowing down, the LEI no longer indicates an impending recession, which is undeniably positive for risk assets such as stocks and cryptocurrencies.

Despite ongoing signs of a deceleration in the U.S. economy, as suggested by key economic indicators, these signals no longer forecast a recession, according to data from The Conference Board, a neutral and charitable research institution. This finding offers hope for risky investments like cryptocurrencies.

As a researcher, I’ve noticed that our Leading Economic Indicators (LEI) dipped by 0.6% in July, sliding down from the 100.6 mark in June. This decline follows a 0.2% drop we saw in the previous month. Interestingly, these indicators reached their peak in the second quarter of this year, and since then, they’ve been on a gradual descent, as suggested by data from our source MacroMicro.

The LEI (Leading Economic Index) includes various predictive factors such as manufacturing workweek hours, initial jobless insurance claims, ISM’s new orders index, stock market values, and a leading credit index. It serves to spot changes in economic patterns and financial market transitions, often regarded as one of the most dependable indicators of an approaching recession – which is defined as two consecutive quarters of negative growth rate expansion.

Economy-wise, the persistent drop in the LEI suggests tough times ahead might not be as immediate as previously thought. But, it’s encouraging to note that the six-month change, annualized to July, narrowed from -3.1% in June to -2.1%. This means the likelihood of a recession could potentially decrease.

“Justyna Zabinska-La Monica, a senior manager in charge of business cycle indicators, explained that while the LEI is still decreasing from month to month, its six-month annual growth rate no longer predicts an upcoming recession,” or more informally, “Although the LEI continues to dip on a monthly basis, Justyna Zabinska-La Monica, our senior business cycle indicator manager, stated that it’s no longer signaling a recession in the coming six months.”

In simpler terms, the current market data seems encouraging for investors who favor riskier assets like stocks and cryptocurrencies. Due to the recent market downturn and the negative mood it’s created, investing in these types of assets might now offer greater potential returns, a concept often referred to as “buying on fear” or “pain trade”.

Economic concerns about a potential recession surfaced early this month as the U.S. nonfarm payrolls report showed a significant decrease in new job creation in July. This led to a steepening of the Treasury yield curve, often indicating an approaching recession, and a similar alarm was sounded by Sahm’s Rule. Moreover, the widespread unwinding of yen carry trades intensified these fears.

Experiencing a significant decline, I observed my investments in stocks plummet and the value of Bitcoin dipping from around $70,000 to $50,000. However, since that period, Bitcoin has managed to bounce back, surpassing the $60,000 mark once more as per CoinDesk’s latest data.

The graph demonstrates that although the Conference Board’s leading index is decreasing, both the indicators reflecting the present state of the economy and those representing later stages are increasing as well. This is typical of an economy approaching its final stages of expansion.