Economic conditions continue to DETERIORATE 221222

As illustrated in The Conference Board’s Leading Economic Indicators (LEI), economic conditions are further worsening and for the fourth straight month are predictive of a 2023 recession.  (see chart)

The LEI dropped below neutral (Warning signal) in July but remained above -4% (pending Recession signal) where it appeared to bounce off a low.  A recovery from this level wouldn’t be uncharacteristic, as a recessionary decline has only occurred three times over the past 20 plus years.  Correspondingly, investor optimism was reflected in August’s impressive stock market rally.  However, the relief rally was shorted lived, as August’s LEI continued to trend below -4% and confirmed a Recession signal.  Deterioration has accelerated as the Fed Funds terminal target rate has risen.  (Keep in mind the LEI is published approximately one month after the reporting period.)

A 2023 Recession is all but assured; however, the question remains, will it be shallow or deep? 

A SHALLOW recession could occur because it’s widely anticipated and policies forcing the decline could swiftly be reversed.  (Recall that the Pandemic recession was nullified because fiscal & monetary policies dumped about $5 trillion into the US economy…Fed policy doesn’t repeat itself but it does rhyme.)

A DEEP recession could occur because wage inflation isn’t abating and an inevitable business cycle contraction is long overdue.  (Recall that a recession was imminent going into 2020.) 

In either case, it’s prudent to have a large cash reserve to take advantage of a stock market downturn. 

On that note and keeping with the Christmas season…

Whatever your religious persuasion, take the time to watch the film classic It’s a Wonderful Life.  George Bailey’s character is admirable, but also pay close attention to the life lesson in economics.   During the banking panic, only Bailey and Mr. Potter keep their heads.  The money line is: “Potter isn’t selling…Potter’s buying.”

Remember those words if the economy goes into recession in 2023.

Happy Hanukkah and Merry Christmas.

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