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The economy is showing a recession signal that has been wrong only once in the last 120 years.
ECRI’s leading indicator for the economy started falling last year, said senior economist Lakshman Achuthan.
GDP growth and the labor market are also weakening in certain areas, which could cause problems in the U.S., he added.
This is a machine translation of an article from our US colleagues at Business Insider. It was automatically translated and checked by a real editor.
The U.S. economy is showing a classic recession warning signal that has proven to be a false positive only once in the last century. Leading economist Lakshman Achuthan has observed this.
The economic expert and co-founder of the Economic Cycle Research Institute (ECRI) pointed to worrying signs of weakness in the US economy. Warning signs of a downturn emerged in several areas of the economy.
The ECRI leading indicator — the economic indicator with a near-perfect track record — has started to decline over the last year, Achuthan said in a webcast with Rosenberg Research on Wednesday.
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The USA is expecting a decline in the economy that could end in a recession
The decline in the index has leveled off in recent months. Nevertheless, in the last 120 years, a decline in the index has always been followed by a recession, says Achuthan. The only exception is the decline in the index after World War II.
“While this is not a guarantee of a recession, it is an indication that there is high vulnerability to shocks,” Achuthan warned. “In most cases, this suggests cyclical vulnerability.”
There are also further signs of an increasing slowdown in the US economy. GDP will slow sharply in the first quarter, with the Atlanta Fed forecasting growth of just 2.5 percent for the most recent three-month period. The U.S. Coincident Index, a growth measure that includes GDP, employment and retail sales, has trended toward zero percent over the past two years, falling from a peak of around 20 percent in 2021.
Hiring conditions are also beginning to deteriorate dramatically. Although job growth looks strong on the surface, the unemployment rate has been rising steadily, reaching its highest level in two years in February.
At the same time, the ECRI index for cyclical working conditions, a measure of the “cyclical work impulses” in the economy, has fallen by almost 50 percent in recent years. This steep decline reflects declines seen before the 2001, 2008 and pandemic-era recessions, ECRI historical data shows.
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Recession is four times more likely than economic growth
The strength in hiring appears to lie in areas that are not discretionary. That’s typically the case before a recession, says Achuthan. Because consumers prioritize their needs over their wants. Job growth in education and health rose about four percent last year, although job growth in all other sectors was zero percent, ECRI data shows.
“Without this development, we would probably have been in recession,” Achuthan said of the growth in non-discretionary employment.
According to Achuthan, these warning signs point to a “tug of war” in the economy. Growth in the USA could be pulled back and forth between economic weakness and external support. This is happening, for example, through stimulus spending and labor hoarding during the pandemic. If that support weakens, it could “lead to problems,” he warned.
Other economists have warned of an impending downturn, especially as inflation could remain stubborn. The Fed is taking the risk of keeping interest rates high for longer. According to top economist David Rosenberg, a recession is four times more likely than economic growth. A downturn with severe job losses could occur before the end of the year.
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