Economic Outlook - October 2023
- The Conference Board Leading Economic Index® (LEI) for the US declined by 0.4% in August 2023 to 105.4 (2016=100), following a decline of 0.3% in July. The LEI is down 3.8% over the six-month period between February and August 2023 – little changed from its 3.9% contraction over the previous six months (August 2022 to February 2023). This reliable index has now fallen for nearly a year and a half, indicating the economy is heading into a challenging growth period with elevated risk of recession over the next year. The US Federal Reserve’s increase in short-term interest rates and the lagging impact of a shrinking money supply due to quantitative tightening are actions intended to reduce inflation. These factors have also contributed to slowing economic growth.
- The US “core” consumer price index inflation rate is 4.35%, compared to 4.65% last month and 6.32% a year ago. This is higher than the long-term average of 3.68%. The core rate (the change in the costs of goods and services, not including more volatile changes from food and energy) is among important inflation metrics for the US economy, closely watched by many economic analysts and policymakers. This measure is provided by the Bureau of Labor Statistics among thousands of inflation measures they publish monthly. While trending down, this and other measures of inflation remain elevated, above the US Federal Reserve goal of 2%.
- Current employment data remains encouraging. While continued strong employment is a useful measure of current economic conditions, it is not particularly strong as a leading indicator. The four-week average of unemployment claims declined to 211,000, up 7.4% over the same period last year, but still quite low, suggesting the economy remains robust. In the past, strong employment has sometimes immediately preceded periods of economic weakness. The demand for labor still exceeds supply. Three job openings exist for every two people seeking employment: a historically rare job market condition. The current low unemployment rate of 3.8% increases the probability the US Federal Reserve will hold interest rates higher for longer than the market anticipates.
- More immediate threats to the US economy in the fourth quarter include the expanding United Auto Workers auto industry strike, the resumption of student debt payments, and rising oil prices. Together, these events could measurably dampen economic vitality.
- The upward surge in mortgage rates (30- and 15-year fixed rates are over 7%) brings caution and reduced volume to the homebuilding industry, a major component of the US economy with a broad-multiplier impact on other industries. New and existing US home sales declined in August.
- The Conference Board Consumer Expectations Index, based on consumers’ short-term outlook for income, business, and labor market conditions, declined to 73.7 in September after falling to 83.3 in August (1985=100). Expectations fell back below 80 – the level that historically signals a recession within the next year. Consumer fears of an impending recession ticked back up, consistent with the short and shallow economic contraction that may occur in 2024.
Sources: FactSet, Yardeni Research, YCharts, National Association of Home Builders, The Conference Board, US Bureau of Labor Statistics, Federal Reserve Bank of St Louis
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