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Labor + Economics

An economic index is flashing a recession warning sign, but it may be a ‘mixed signal.’ Here’s what you need to know

October 31, 2022

Labor + Economics

An economic index is flashing a recession warning sign, but it may be a ‘mixed signal.’ Here’s what you need to know

October 31, 2022

Photo by Tech Daily on Unsplash

Other recession hallmarks are mixed

A recession is generally defined as a broad-based, significant decline in economic activity that lasts for more than a few months, according to the National Bureau of Economic Research, a non-government agency that identifies recessions.

While the economy did contract in the first two quarters of 2022 by 1.6% and 0.6%, respectively, other factors that characterize a recession — such as widespread jobless claims and a broad drop in personal wages and salaries — have not materialized.

Some LEI changes are ‘not significant’

The Leading Economic Index is based on 10 components that detail factors like jobless claims, manufacturing orders and performance of the S&P 500 stock index, a broad barometer of how U.S. companies are faring. Some of those components show significant weakness — the S&P is down 20.3% year to date through Oct. 24 — while others do not.

For instance, while the average weekly hours worked in manufacturing has trended downward on a monthly basis since February when it was 41.6, September’s reading wasn’t too far below that at 41.1, according to the U.S. Bureau of Labor Statistics.

“A decline of a half-hour per week is not significant,” Bethune said.

Initial jobless claims — another data point used in the index — also do not point to the kind of broad-based job loss that comes with a recession. The most recent data shows 214,000 initial claims were filed in the week ended Oct. 20, which is a reduction from 226,000 in the previous week.

That could change, of course.

Fed rate hikes could cool the job market

The Federal Reserve is expected to continue pushing up interest rates in an effort to bring down persisting high inflation. The general idea is that by making the cost of borrowing money more expensive, spending is reduced, which in turn will slow consumer demand and ease inflationary pressure.

However, reduced demand also can translate into job and/or income loss — which generally is the primary pain point for households in a recession. Yet despite the Fed’s moves, unemployment remains low, at 3.5%, according to the latest data from the U.S. Bureau of Labor Statistics.

“Hard data on a monthly basis do not suggest the labor market overall is cooling fast,” said Alessandro Rebucci, an associate professor of economics at Johns Hopkins University.

“There are pockets of the labor market that have shed jobs, but it’s not widespread job loss,” he said.

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Some economists say economic data is a mixed bag right now, making it hard to predict what’s going to happen in the upcoming months.
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