May 2024 Recession Watch

Recession is a normal part of the business cycle, characterized by a period when the economy contracts rather than grows. It's often marked by decreased spending, decreased production, higher unemployment, and lower consumer confidence. During a recession, businesses may slow down, lay off workers, or close. This can impact people's livelihoods and financial stability. Recessions are typically temporary but can vary in severity and length. Although recessions are difficult to predict, some indicators precede them, which we can monitor to gauge where we are in the business cycle and how likely or unlikely a recession might be in the coming months.

The Conference Board, founded in 1916, is a non-profit research organization that provides valuable insights into economic trends, labor market conditions, and consumer confidence. The organization assists businesses and policymakers in making informed decisions through its various indices and reports, such as the Consumer Confidence Index and the Leading Economic Index. The Conference Board is recognized for its independent research and analysis, which helps shape economic perspectives and forecasts globally.

The Conference Board Leading Economic Index® (LEI) for the U.S. decreased by 0.3 percent in March 2024 to 102.4 (2016=100), after increasing by 0.2 percent in February. Over the six-month period between September 2023 and March 2024, the LEI contracted by 2.2 percent—a smaller decrease than the 3.4 percent decline over the previous six months.

The yield on the 3-month Treasury bill is currently higher than the yield on the 10-year Treasury note. This situation, known as a yield curve inversion, means that investors receive higher returns from short-term Treasury investments than long-term Treasury securities. This phenomenon is often observed before recessions, as it may signal that the bond market expects lower interest rates in the future due to a slowdown in economic growth. The gray vertical bars in the chart below indicate periods of recession.

The Federal Reserve Bank of New York uses the yield curve spread to estimate the probability of a recession over the next 12 months. U.S. Recession Probability is at 58.31%, higher than the long-term average of 14.71%.

The Sahm Rule Recession Indicator, created by economist Claudia Sahm, is a coincident indicator, indicating that the economy is in recession often before the NBER (National Bureau of Economic Research) declares a recession has begun. It is triggered when the three-month moving average of the U.S. unemployment rate rises by 0.5% above its low in the previous 12 months.

The unemployment rate and initial claims for unemployment benefits are low. As measured by the US Gross Domestic Product (GDP), the economy is growing, but the indicators suggest an elevated probability of future economic contraction.