Breitbart Business Digest: Faltering IT Sales and Leading Indicators Point Toward Recession

The Index of Leading Economic Indicators Says a Recession Is Coming

One of the key gauges of the U.S. business cycle is once again ringing the alarm about an upcoming recession.

The Conference Board said Thursday that its Leading Economic Index (LEI) dropped by a sharp 1.2 percent in March after declining 0.5 percent in the prior month. With a reading of 108.4, the index is at its lowest level since November 2020.

It’s not just the depth of the decline in the LEI that is concerning; it is also the duration. March was the twelfth consecutive decline, the longest streak of declines since the index fell from 2007 through 2009 during the global financial crisis.

“The U.S. LEI fell to its lowest level since November of 2020, consistent with worsening economic conditions ahead,” said Justyna Zabinska-La Monica, Senior Manager of Business Cycle Indicators at The Conference Board.

The LEI is a predictive barometer of the economy that has a history of accurately anticipating turning points in the business cycle by around seven months. It is based on 10 components—including jobless claims, average weekly hours, new orders for manufactured goods, building permits, stock prices, and consumer expectations about economic conditions.

“The weaknesses among the index’s components were widespread in March and have been so over the past six months, which pushed the growth rate of the LEI deeper into negative territory. Only stock prices and manufacturers’ new orders for consumer goods and materials contributed positively over the last six months,” Zabinska-La Monica said.

The Conference Board forecasts that economic weakness will “intensify and spread more widely” throughout the U.S. economy over the coming months. It forecasts a recession will start in the middle of this year. Of course, we know that the staff economists at the Federal Reserve also now see a recession likely to arrive in the second half of 2023. Recent polling by CNBC found that 57 percent of the public thinks there will be a recession sometime during the next 12 months—in addition to nine percent who say we are already in a recession. Just 25 percent say no recession is coming soon.

A Warning from a Tech Giant

Some of the folks who are expecting a recession run important U.S. businesses. This week, IT services giant CDW pre-announced disappointing first quarter results. The company sees sales for the quarter coming in at $5.1 billion, a good deal below the consensus analyst forecast of $5.6 billion. The company said that some of its largest customers are slowing spending.

“The first quarter was marked by a period of intensifying economic uncertainty that led our customers to spend more cautiously and prioritize mission-critical initiatives,” CDW CEO Christine A. Leahy said in a statement. “This demand contraction resulted in first-quarter performance below our expectations. Volume declines were most acute with our largest commercial customers and across transactional products.”

Leahy has a good track record. Last year, when many thought the economy would slip into a recession in the second half of 2022, she took the other side. “While we’re cognizant of economic headlines, to-date we have not seen a change in behavior that would impact our view on the second half of the year,” she said.

The company said that given the fall in IT spending and heightened customer caution, it is going to try to rein in its own fixed costs. That gurgling sound you hear is the noise of contraction trickling through the economy.

In a note downgrading shares of CDW, analysts at Bank of America said that “most hardware companies in our coverage have indicated weak enterprise spending.” CDW shares are down more than 12 percent this week.

Bullard Is Still Bullish

Not everyone agrees that a recession is in the offing. In an interview this week with Reuters, St. Louis Fed President James Bullard said he expected labor market strength to bolster consumption this year.

“Wall Street’s very engaged in the idea there’s going to be a recession in six months or something, but that isn’t really the way you would read an expansion like this,” Bullard said.

Bullard also pointed out that the St. Louis Fed’s financial stress index, which spiked on the collapse of Silicon Valley Bank, is not pointing to any problems now.

“If you were really going to get a major financial crisis out of this, that index would spike up to a four or five. It’s zero now. So it doesn’t look, as of this moment, like too much is happening,” Bullard said.

Actually, it’s even better than that. The latest reading, published on April 14, is negative 0.5.

Bullard added that he would like to see the Fed’s target get up to 5.5 percent to 5.75 percent, well-above the one-and-done 25 basis point increase the market currently expects.

Fed Governor Christopher Waller, who was previously the research director and an executive vice president at the St. Louis Fed, appears to be on the same page as his old boss. “Because financial conditions have not significantly tightened, the labor market continues to be strong and quite tight, and inflation is far above target, monetary policy needs to be tightened further. How much further will depend on incoming data on inflation, the real economy, and the extent of these tightening credit conditions,” Waller said.