Leading Index Declines, Recession Risk Still Low

The leading economic indicator has declined, but recession risks remain low.

The closely watched US economic activity index declined for the fourth consecutive month in May, but economists say it is too early to sound the alarm about a recession.

The Leading Economic Indicator (LEI) released by the Conference Board fell 0.1% in May, following a 0.2% drop in April. This index aims to predict future economic activity and has a track record of accurately signaling recessions.

However, economists say the current decline in the LEI is not sufficient to raise recession concerns. They point to other positive economic indicators, such as strong job growth and low unemployment rate, indicating that the economy remains on a strong footing.

"The LEI should not be overemphasized as it is just one piece of data," noted [Economist Name], an economist at [Company Name]. "There are still many positive indicators pointing towards a strong economy."

Causes of the LEI's Downturn

There are a couple of potential reasons for the recent drop in the LEI. One explanation could be the impact of the Federal Reserve's interest rate hikes. The Fed has raised interest rates three times this year to combat inflation. Higher interest rates can increase the cost of borrowing for businesses and consumers, which may slow down economic growth.

Another possibility is that the decrease in the LEI reflects the economy slowing down after several years of strong growth. In 2021, the U.S. economy expanded at a rate of 3.9%, but economists predict a slowdown to around 2.5% this year.

What to Watch

Economists will keep a close eye on the LEI in the coming months to see if the decline continues. If the index keeps dropping for several more months, it could signal an upcoming recession.

However, most economists currently hold a positive view of the economy. They believe that the Fed will be able to achieve a "soft landing," which involves slowing down the economy without causing a recession.

Only time will tell whether the recent decline in the LEI is a temporary fluctuation or a sign of more significant challenges ahead.