The US economy is flashing a classic recession warning that has only shown a false positive once in the last century, according to top economist Lakshman Achuthan.
The business-cycle expert and cofounder of the Economic Cycle Research Institute pointed to troubling signs of weakness in the US, with warning signs of a downturn cropping up in multiple areas of the economy.
The ECRI’s Leading Economic Index — the economic indicator with a near-perfect track record — has started to decline over the last year, Achuthan said, speaking in a webcast with Rosenberg Research on Wednesday.
The decline in the index has started to level out in recent months. Still, a fall in the index has been followed by a recession every time over the last 120 years, he noted, with the exception of when the index declined after World War II.
“That, while is not a guarantee of a recession, it certainly is an indication that there’s a lot of vulnerable to shocks,” Achuthan warned. “More often than not, it really speaks to cyclical vulnerability.”
That’s compounded by other signs of an increasingly sluggish US economy. GDP is set to slow dramatically over the first quarter, with the Atlanta Fed forecasting expansion of just 2.5% over the most recent three-month period. Meanwhile, the US Coincident Index, a growth measure that includes GDP, jobs, and retail sales data, has trended near 0% over the last two years, plunging from a peak of around 20% in 2021.
Hiring conditions are also starting to weaken dramatically. Though jobs growth looks strong on the surface, the unemployment rate has ticked steadily higher, notching its highest level in 2 years in February.
Meanwhile, the ECRI’s Cyclical Labor Conditions index, a measure of “cyclical labor impulses” in the economy, has plunged nearly 50% over the past few years. That steep decline mirrors falls seen prior to the 2001, 2008, and pandemic-era recession, historical data from the ECRI shows.
Hiring strength seems to lie in non-discretionary areas of the market — which typically occurs before a recession, Achuthan said, as consumers prioritize needs over wants. Job growth in education and health rose around 4% last year, though job growth in every other sector trended near 0%, ECRI data shows.
“Without that, probably would have been in recession,” Achuthan said of non-discretionary hiring growth.
According to Achuthan, those warning signs point to a “tug-of-war” in the economy, with growth in the US being pulled back and forth between cyclical weakness and external support, such as stimulus spending and labor hoarding during the pandemic. If those supports fade, that could “spell some trouble,” he warned.
Other economists have sounded the alarm of a coming downturn, especially as the inflation could remain sticky and the Fed risks keeping rates higher for longer. According to top economist David Rosenberg, a recession is four times more likely to happen than an economic expansion, and a downturn with steep job losses could come sometime before the end of the year.
