As an educator at several banking graduate schools, I have taught over 5,000 bankers in my 30 years of experience. While my courses primarily focus on interpreting economic change, agriculture is not a typical topic. During our discussions, we often examine economic indicators that predict and signal the direction of the economy. In this article, I will be discussing some of these indicators and delving into the current state of the US economy.
One of my favorite indicators is the Consumer Sentiment Index published by the University of Michigan. As consumers and services drive nearly 70% of the U.S. economy, this metric is highly significant. Over the past 15 months, the index has been below 75, indicating a possible recession. However, the $2.9 trillion in stimulus and savings accumulated during the pandemic has helped absorb the shock to the economy. Unfortunately, these government checks and savings are expected to be spent by the end of 2023. Combined with credit tightening by the banking industry due to recent banking problems, this could signal a possible recession.
Another economic indicator is the Leading Economic Index (LEI), which has been used by economists since the Great Depression to predict economic direction. The LEI Diffusion Index, which measures the positivity or negativity of the 10 components that make up the LEI, has displayed weakness in recent months. If the LEI falls by 3/10% consecutively for three months or drops more than 1 point over three-month periods, the chances of a recession within a year increases to 70%. This indicator predicts the possibility of a recession from mid-2022 onwards.
The yield curve is another time-honored standby of economic indicators, which monitors two indicators: 1-year and 10-year financial instruments. An inverted yield curve occurs when a 2-year fund is more expensive than its 10-year counterpart and historically precedes most recessions in the US and abroad. The steeper the slope of the yield curve inversion, the more likely a recession. An inverted yield curve generally indicates that a recession may be imminent over the next 12 to 15 months. Unfortunately, the yield curve has been inverted since approximately mid-2022.
While many economic indicators point towards an approaching recession, the economy is currently doing well with stimulus and savings being spent through the services sector, travel, and other industries. Additionally, economic policies are very accommodating, which helps to ease the pressure. Only time will tell how the economy will fare in the future.