If forecasts are correct, the leading indicator will have grown by less than a quarter of a percentage point in year-over-year terms.
Analysts are forecasting that Thursday’s release of the Conference Board’s leading economic indicator of U.S. growth will show a 0.2% decline for October, the third month in a row of negative growth. As the chart below illustrates, the leading indicator has been decelerating since last October on a year-over-year basis, and it is now flirting with zero growth relative to October 2018.
If these forecasts are correct, the leading indicator will have grown by less than a quarter of a percentage point in year-over-year terms. That’s the lowest growth rate since the end of the commodity-induced mini-recession of 2015-16, and before that in 2012-13, in comparison to the inflated rates of expansion from the depths of the 2007-09 Great Recession.
Recent economic data supports negative expectations for the leading indicator. After all, the labor market is drifting sideways — suggesting the end of a long expansion — while the latest ISM survey indicates that new manufacturing orders remain under water, which is consistent within a global manufacturing recession.
Furthermore, industrial production growth has reported monthly declines in six of the past 12 months and negative yearly growth rates for September and October. Because the yearly growth rate of industrial production yearly has a correlation coefficient of 0.79 with the Conference Board’s leading economic indicator, that would in and of itself confirm the expectations for a decline in the leading indicator and the ongoing slowdown in the overall economy.
The leading indicator was designed to identify turning points in the business cycle as opposed to GDP forecasts. So while the third quarter of 2018 appears to be the pivot point in this latest business cycle, GDP managed to continue growing, propped up by a tightening labor market and increases in wages, and robust consumer spending.
Manufacturing slowdown spreads
Nevertheless, the slowdown we’ve seen in the manufacturing sector now appears to be slowly spreading to the overall economy; this is most likely a result of the endless stream of false starts in trade negotiations and the increasing uncertainty over the direction of public policy and private investment that has consumers thinking ahead and beginning to tighten their purse strings.
The impact of the U.S. trade war is now showing up in the economic data. Real GDP growth has been slowing, from 3% in the second quarter of 2018 when the tariffs were introduced, to 2.0% in the third quarter of 2019 as the trade disruptions first infected North American trade, then China’s ability to continue growing at a high 7%-plus rate, and by extension Germany’s manufacturing sector, which relies on the expansion of China’s industrial growth. (One can also throw in the UK’s attempt to make it difficult to trade within the EU common market, its largest trading partner.)
As the figure below illustrates, our RSM monthly GDP model has early projections of the U.S. economy growing at 1.5% yearly rate in the fourth quarter. A less-than-2% growth rate is unsettling because it sets the table for any unexpected event pushing the economy into outright recession.