Shifting Economic Indicators Suggest Stability, Not Recession
For the first time in two years, a key recession indicator has shifted, suggesting stabilization within the U.S. economy, despite persistent financial challenges. The Conference Board’s Leading Economic Index, which encompasses ten economic indicators, showed a 0.4% decline in January. This decline is part of a broader trend where the index has fallen 3.0% over the past six months, signaling a slowdown but not a full-blown recession. Justyna Zabinska-La Monica, the senior director of business cycle indicators at the Conference Board, notes that while no immediate recession is predicted for 2024, a gradual deceleration in real GDP growth could be expected over the next few years.
Inflation Expectations: A Potential Self-Fulfilling Prophecy?
There’s growing concern that sustained high inflation might embed itself in the economic expectations of consumers and businesses, potentially becoming a self-fulfilling prophecy. Henry Allen, a macro strategist at Deutsche Bank, points out that the longer inflation rates exceed the Federal Reserve’s target of 2%, the more likely it is that expectations could cause an upward spiral. Recent data from the University of Michigan suggests that consumer inflation expectations have risen to 3% for the coming year, mirroring recent upticks in the Consumer Price Index, which exceeded forecasts last week.
The Compounding Effect of Wage-Price Feedback Loops
Allen further elaborates on the dynamics of inflation feedback loops, where businesses and consumers adjust their behavior based on expected price increases. This anticipation often leads businesses to set higher prices preemptively, which can then prompt workers to demand higher wages to compensate for rising living costs. These wage demands can, in turn, lead businesses to hike their prices further, fueling a continuous cycle of wage and price increases. According to data from the Bureau of Labor Statistics, inflation has consistently topped the Fed’s target since March 2021, complicating efforts to steer it back to desired levels. This entrenched inflation challenges the Fed’s ability to manage perceptions and stabilize the economy efficiently.