April 2023 was a month of retracement for the American Institute for Economic Research’s Business Conditions Monthly. AIER’s Leading Indicator rose to 58 in April from 41 in March, returning to levels seen in both January and February 2023. The Roughly Coincident Indicator rose from 83 in March to 92 in April, reclaiming its February 2023 level. And our Lagging Indicator declined from 66 in March to 42 in April, settling between February’s 33 and January’s 50 levels.
Leading Indicators (58)
Among the twelve components of the Leading Indicator, from March to April 2023 seven rose and five fell. Rising were all three of the Confidence Board indicators (US Leading Index Manufacturing New Orders Consumer Goods & Materials, 0.1 percent; US Manufacturers New Orders Nondefense Capital Good Ex Aircraft, 1.0 percent; US Leading Index Stock Prices 500 Common Stocks, 3.9 percent), the University of Michigan Consumer Expectations Index (2.2 percent); US New Privately Owned Housing Units Started by Structure (2.1 percent); Adjusted Retail & Food Services Sales (0.4 percent); and United States Heavy Truck Sales (15.8 percent). Heavy truck sales, as a leading indicator, typically decline during the months leading up to an economic contraction.
Declining from March to April 2023 among the Leading Indicator constituents were US Average Weekly Hours All Employees Manufacturing (-0.2 percent), US Initial Jobless Claims (-0.6 percent), Inventory/Sales Ratio, Total Business (-0.7 percent), 1-to-10 Year Treasury spread (-1.9 percent), and debit balances in brokerage margin accounts (-2.1 percent).
From mid-2021 through mid-2022, the AIER Leading Indicators were in a mostly neutral range. They then shifted down into a contractionary trend in the second half of 2022, coinciding with two quarters of negative US GDP and the July 2022 peak of the inflationary trend which began in early 2021. For the first third of 2023, the prevailing movement among the aggregate of the twelve Leading Indicators has been neutral amid increasingly obdurate inflation, low unemployment, and slowing growth.
Roughly Coincident (92) and Lagging (42) Indicators
In April 2023 five of six coincident indicators increased, while one changed insignificantly per the index construction rules. Those included three Conference Board indicators: Coincident Manufacturing and Trade Sales (0.3 percent), Coincident Personal Income Less Transfer Payments (0.2 percent), and Conference Board Consumer Confidence Present Situation (1.5 percent). Elsewhere, US Industrial Production and US Employees on Nonfarm Payrolls increased by 0.5 percent and 0.2 percent respectively. US Labor Force Participation Rate remained flat on a month-over-month basis.
Among the six components of the Lagging Indicator two rose, three declined, and one remained flat from March to April. Both the Census Bureau US Private Constructions Spending (Nonresidential) and 30-day average bond yields increased; the former by 0.9 percent and the latter by 0.6 percent. Falling were the US CPI Urban Consumers Less Food & Energy (-1.7 percent), Conference Board US Lagging Avg Duration of Unemployment (-7.2 percent), and ISM Manufacturing Report on Business Inventories (-0.06 percent). Conference Board US Lagging Commercial and Industrial Loans remained unchanged.
As has been the prevailing theme since the start of 2023, the internals of all three of the Business Conditions Monthly indicators have been characterized by mixed readings. Of the twenty-four total constituents, leading indicators saw five of the six largest increases and four of the six largest declines from March to April 2023. Of the six coincident indicators, five were among the median eight (ordered and ranked ninth through sixteenth) of the twenty-four total constituents, with monthly returns ranging from 0 percent to 0.5 percent.
The first quarter US Gross Domestic Product release on 27 April confirmed that economic activity has been slowing in accordance with the Federal Reserve’s rate hikes: a 1.1 percent increase in output versus 2.6 percent in the prior quarter. Meanwhile core Personal Consumption Expenditure (PCE) inflation rose at an annual rate of 4.6 percent in March 2023. The “supercore” PCE measure (excluding gas, electricity, and housing), which Fed Chairman Jerome Powell is said to favor, saw a 3-month increase of 4.7 percent, 6-month increase of 4.7 percent, and a 4.5 percent increase on an annualized basis. Sticky inflation measures amid instability in regional banks put the US central bank in the precarious position of picking between the stable price and financial stability mandates, although Fed officials have stated their intention of making the former their primary focus. Owing to the dual effect of contractionary monetary policy and credit tightening in the wake of the collapse of several regional banks, the start of April 2023 evinced the largest decline in commercial loans and leases in almost five decades.
Conference Board US Leading Index Diffusion 6-Month Span (2000 – present)
US Probability of Recession within 12 months based upon 3mo-18mo
2 yr-10 yr, & 3 mo-10yr YC inversion
Consumer spending was boosted artificially in January by unseasonably good weather and Social Security Cost of Living Adjustments (COLA), but has slowed through the subsequent two months. Similarly, federal employment data indicates an uncommonly strong labor market while state data, including initial claims and WARN filings, show moderation developing apace. Additionally, bankruptcy filings in the first three months of 2023 were the highest in any first quarter since the first quarter of 2010.
AIER’s April Business Conditions Monthly indicators reflect the disparate, and to some extent offsetting economic signals emergent within the US economy today. Of note, Morgan Stanley’s Recession Probability Indicator, which employs eleven economic variables, similarly propounds elevated yet vacillating contractionary prospects: presently a 38 percent chance of a recession within the next twelve months. Nevertheless, our May 2023 forecast of a recession within the next twelve to eighteen months remains in effect.
Morgan Stanley Recession Probability Indicator
Leading Indicators (1980 – present where possible)
Roughly Coincident Indicators (1980 present where possible)
Lagging Indicators (1980 present where possible)
Capital Market Performance
(All charts and market data sourced from Bloomberg Finance, LP)