Leading indicators still point to a recession – Time for something stronger than a milkshake

Summary

This three-in-one report breaks down all you need to know about this morning's trio of economic indicators. Industrial production was unchanged, leading indicators still point to recession and consumer sentiment slipped. Time for something stronger than a milkshake.

Consumers less worried about inflation

Consumer sentiment slipped in February for the first time in four months but sentiment remains more upbeat than at any point in the second half of 2022.

The dates of this preliminary read on Consumer Sentiment spanned from February 22 to March 15, so the banking crisis is likely to be more fully incorporated in the final report released on March 31. That said, the hit to sentiment from recent financial turmoil may not weigh on sentiment or meaningfully dent spending, at least in the short run. The text accompanying the University of Michigan's report stated this explicitly: "Our data indicate little impact of thesedevelopments on consumer attitudes. Overall, the average consumer has little portfolio exposure to financial markets and typically does not pay close attention to financial market developments that do not directly impact them. Of the interviews completed after March 9, only a handful spontaneously mentioned bank failures."

Consumers short-term inflation expectations fell to 3.8%; that is the lowest since April 2021. If policymakers at the Federal Reserve opt to pause their regimen of rate increases at next week's policy meeting amid the instability in the banking sector, the drop in inflation expectations offers some cover to do so. There is less urgency to hike rates if consumer mindsets have at last pivoted to expect slower inflation.

Higher interest rates are the right medicine for curing inflation even if the crisis in the banking sector suggests an adverse reaction to it. We do not think the job of bringing inflation down is complete, but we do expect the Fed to remain on hold at the conclusion of its monetary policy meeting next week. When the instability in the banking system clears, it will once again be time to take more medicine, which the Federal Reserve will administer with additional rate hikes at its May and June meetings.

Clear recession warning from LEI

The recession warning from the Leading Economic Index (LEI) remains clear. The LEI slipped for the 11th-straight month, down 0.3% in February. The index is now about 6.5% lower than where it was a year ago and the six-month average change in the index remains below the recession threshold of -0.4%.

The LEI includes ten components covering labor market conditions, consumer behavior, manufacturing activity and financial conditions. Weakness continued to be fairly widespread across the different index components, signaling slower economic conditions ahead. A rebound in building permits was the notable standout and prevented the index from declining by more. Notably, the employment components (average weekly hours in the manufacturing sector and initial jobless claims) both contributed negatively to the index last month. Stock prices provided a modest boost to the February LEI, but we expect the components tracking financial conditions to come under considerable pressure if we continue to see conditions tighten.The consumer expectations component has now been a drag on the LEI for nineteen straight months.

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