A forward-looking measure of the U.S. economy fell again in August, with most components in negative territory, the Conference Board said on Thursday.
The business organization’s leading economic index fell 0.3% for the month, following a 0.5% drop in July. It has now fallen by 2.7% in the past six months after a 1.7% gain in the prior six months.
“The US LEI declined for a sixth consecutive month potentially signaling a recession,” Ataman Ozyildirim, senior director, economics, at the board. “Among the index’s components, only initial unemployment claims and the yield spread contributed positively over the last six months – and the contribution of the yield spread has narrowed recently.”
Ozyildirim said that the strong labor market is likely to continue softening in the coming months, adding to the likelihood of an economic downturn.
“Indeed, the average workweek in manufacturing contracted in four of the last six months – a notable sign, as firms reduce hours before reducing their workforce,” he added. “Economic activity will continue slowing more broadly throughout the US economy and is likely to contract.”
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The index is yet another sign that the economy is slowing in the face of higher interest rates from the Federal Reserve. The central bank raised rates again on Wednesday, while signaling more hikes to come. Fed Chairman Jerome Powell has acknowledged that its attempts to corral inflation will cause “pain” to both consumers and businesses.
“There’s no way to know definitively when or at what level the Fed’s policy rate will peak, but there should be little doubt that policymakers are firmly focused on bringing inflation back under control, even if it results in outright job losses and a recession,” said Jim Baird, chief investment officer at Plante Moran Financial Advisors. “Following yesterday’s third consecutive 0.75% hike, another 1.25% still appears to be in the cards by the end of the year.”
On Thursday, the Labor Department reported that claims for weekly unemployment benefits rose slightly last week but are still in a range that reflects a strong labor market. Other components of the economy, notably the housing market, are buckling under the regime of higher interest rates the Fed has adopted.
Also Thursday, mortgage rates hit their highest level since 2008, when the country was in the grips of the Great Recession.
“For housing markets, higher borrowing costs are the very remedy the Fed is prescribing in order to cool demand and lower overheated prices,” said George Ratiu, manager of economic research at Realtor.com.
“The monetary tightening is achieving its intended purpose, with sales of existing homes down for seven consecutive months and August sale prices down 6% from their June peak,” Ratiu added. “While sale prices were still higher than a year ago, the growth moderated into single-digits, a clear sign that the exponential growth of the past several years has slowed.”