Recession Looms: Index of Leading Indicators Dropped Sharply Again in December

A key measure of the health of the U.S. economy declined for the tenth straight month in December, pointing to a recession in the near future.

The Conference Board’s index of leading economic indicators (LEI) declined one percent compared with the previous month. The prior month’s figure was revised to show a 1.1 percent decline, worse than the one percent initially reported.

The drop is steeper than expected. Analysts polled by Econoday had expected the index to fall between 0.6 percent and 0.8 percent, with the median forecast at 0.7 percent.

“The US LEI fell sharply again in December—continuing to signal recession for the US economy in the near term,” said Ataman Ozyildirim, Senior Director, Economics, at The Conference Board. “There was widespread weakness among leading indicators in December, indicating deteriorating conditions for labor markets, manufacturing, housing construction, and financial markets in the months ahead.”

The index is comprised of 10 indicators that are thought to provide information about the direction of the economy. Nearly every one of the indicators posted a decline in December. For the six months from June through December, most of the indicators made negative contributions to the index. The exceptions were the financial components, including stock prices and bond spreads, as well as new orders for manufactured consumer goods.

The index fell 4.2 percent over the second half of 2022—a much steeper rate of decline than its 1.9 percent contraction in the first half.

The Conference Board also tracks what it calls the Coincident Economic Index. This is a measure of current activity rather than one that forecasts turns in the economy.  This rose increased 0.1 percent in December.

“Meanwhile, the coincident economic index (CEI) has not weakened in the same fashion as the LEI because labor market related indicators (employment and personal income) remain robust. Nonetheless, industrial production— also a component of the CEI—fell for the third straight month. Overall economic activity is likely to turn negative in the coming quarters before picking up again in the final quarter of 2023,” Ozyildirim said.