There is such an indicator — LEI (The Leading Economic Index). It shows where the economy is moving in the short term. In the picture it is shown in blue and GDP in grey.
In May, its value decreased by 0.7 per cent after a 0.6 per cent drop in April. Consumers have increasingly lower expectations of business conditions. New orders and credit conditions are also deteriorating.
The performance of this index is now fundamentally at odds with what Powell says. That is, we can expect a recession.
However, such signals don’t always work: the second chart shows that in 2020 the signal worked with a lag, rather than predicting a crisis. But there was an unprecedented story there for the world economy.
Powell also has reasons to believe that recession can be avoided:
- Inflation has started to slow, which means it doesn’t make sense to raise rates at the same rapid pace.
- Mortgage applications are starting to slowly pick up.
- U.S. banks have successfully passed the stress test.
- Despite the increase in bankruptcies, they are still far from 2009 and 2020 levels.
- The market has turned around and entered a bullish phase.
However, the inversion of the treasury yield curve still looks threatening and reflects tight borrowing conditions.
