The AIER Business Cycle Conditions Leaders index rebounded in July to a reading of 83 from 75 in the prior month. The Coinciders index remained at a perfect 100 for a fifth month while the Laggers index dropped to 50 from 58 in June (chart 1).
Business Conditions Monthly
The AIER Business Cycle Conditions Leaders index fell again in June, to a reading of 75, the second monthly decline in a row. The Coinciders index remained at 100 for a fourth month, while the Laggers index dropped to 58 from 75 in May.
The AIER Business-Cycle Conditions Leaders index fell slightly to 79 in May, the first decline since July 2016. The Coinciders index remained at a perfect 100 for a third month, while the Laggers index held at 75 for the second month.
Economic data over the past month show mostly favorable underlying trends. The labor market remains the cornerstone of the expansion, with job creation and wage gains boosting aggregate personal income. Consumer spending continues to trend higher with some pockets of weakness.
The AIER Business-Cycle Conditions Leaders index rose to 83 in March, the highest level in two and a half years (Chart 1). The Coinciders index rose to a perfect 100, the highest level since September 2015, while the Laggers index pulled back to 83 from 92 in the prior month.
The U.S. economy continues to expand at a solid pace. The AIER Business-Cycle Conditions indexes all posted results well above the neutral 50 level in the latest month, February. Our Leaders registered 75 for the third consecutive month (Chart 1).
The U.S. economy performed solidly in 2016, according to the latest data from the Bureau of Economic Analysis. Our index of Primary Leading Indicators also remained well into expansionary territory in the latest month, suggesting a low risk of recession in the months ahead. With the Federal Reserve’s slow approach to a tightening monetary policy, the greatest risk is that we don’t know what to expect from Trump administration policies.
The outlook for the U.S. economy continues to improve. Our index of Primary Leading Indicators rose again in the latest month, the labor market continues to show strength, financial conditions remain favorable, and business and consumer confidence are broadly upbeat.
Business conditions continue to improve. Our index of Primary Leading Indicators rose for the third straight month, reaching its highest level since September 2015. Contributing to the increase were improvements in consumer expectations and real new orders for core capital goods.
Consumer spending slowed to a 2.1 percent annual rate in the third quarter from a strong 4.3 percent pace in the second quarter, according to the latest data on real gross domestic product from the Bureau of Economic Analysis. On a year-over-year basis, personal consumption expenditures, a measure of real consumer spending, grew at a 2.6 percent rate, down slightly from a 2.7 percent pace in the second quarter (Chart 1).
Excessive debt played a major role in the Great Recession, from December 2007 to June 2009. In the seven years since the recession ended, home prices have rebounded, and households have significantly reduced their debt load. Only recently have households begun to increase their overall debt, which has inched up just 2 percent from when the recession began. Debt growth for corporate and small businesses has been more significant, rising 36.5 percent and 29 percent, respectively.
The U.S. economy continues to expand at a pace below its long-term average. Revised data show the economy grew at a 1.1 percent annual rate in the second quarter compared with a long-term average annual rate of 3.2 percent. Consumer spending, a key driver, rose 4.4 percent and contributed 2.9 percentage points to overall economic growth. Business fixed investment remains weak, hampered by poor performance in the domestic energy industry, but our conclusion remains that it may well improve in the second half of 2016.
The latest data on real gross domestic product, or GDP, show that the economy expanded an anemic 1.2 percent in the second quarter of 2016. That is the first time the U.S. economy has posted three consecutive quarters of growth below 1.5 percent since the time of the Great Recession.
The U.K.’s surprising June 23 referendum vote to leave the European Union (Brexit) caused dramatic moves in global capital markets. In the days that followed, politicians from around the world offered a wide range of comments, from support for Brexit and independence movements in other European nations to anger and threats. In the U.K. protesters against Brexit took to the streets, while a string of political resignations left a leadership void.
AIER’s Business-Cycle Conditions model rebounded in May to 50, a neutral position, following two months at 38, a level that had indicated economic weakness. This uptick supports our expectation that a strong labor market would boost consumer sentiment and spur further gains in consumer spending. It also justifies our reluctance to assert that a recession was likely when our index first fell below neutral. With our Leaders back at the 50 threshold, AIER researchers judge the risk of recession has receded, although it is still slightly elevated.
The AIER Business-Cycle Conditions model shows the Leaders index unchanged at 38 for a second straight month (Table 1). While a reading below 50 reflects significant economic weakness, we believe it remains too early to conclude that a U.S. recession is likely in the next six to 12 months.
The data we track to monitor economic trends indicate a weakening economy in the coming months. The latest update of the AIER Business-Cycle Conditions model shows a decline to 38 in our index of Leaders, its first drop below the neutral 50 level in 110 months. While this reflects spreading weakness and suggests caution, it is too early to call a recession for two reasons.
AIER founder Col. E.C. Harwood believed that business cycles matter and should be taken into account when making personal financial plans. He wrote his classic, “Cause and Control of the Business Cycle,” (https://www.aier.org/sites/default/files/Documents/Research/pdf/eeb197409.pdf) published in 1932, to help people understand their significance.
The U.S. economy has struggled with inconsistent performance for much of the current expansion, which began halfway through 2009. That inconsistency reared up again in the last three months of 2015. The initial estimate for gross domestic product, or GDP, the broadest measure of economic activity, shows that growth slowed in that period. Future revisions based on more complete data may show a different picture, but the first take puts real GDP rising at a meager 0.7 percent annual rate compared with a 2 percent pace in the third quarter and 3.9 percent in the second.
U.S. consumers are supporting growth, while credit tightening at the Federal Reserve and moderate economic expansion in the U.S. contrast with a sluggish global economy and generally stimulative central bank policies. Dollar strength and commodity weakness continue. Despite a roughly flat year for the broader market, commodity-related equities sharply underperformed the S&P 500 Index. Looking ahead, interest rates are likely to rise slowly, while the risk of recession remains relatively low.