If we head into recession this Spring, would we see it?

There have been a couple of worrying signs in recent economic reports. The biggest flashing light was today’s Leading Economic Indicator (LEI) report.

The Conference Board Leading Economic Index® (LEI) for the U.S. fell by 1.2 percent in March 2023 to 108.4 (2016=100), following a decline of 0.5 percent in February. The LEI is down 4.5 percent over the six-month period between September 2022 and March 2023—a steeper rate of decline than its 3.5 percent contraction over the previous six months (March–September 2022).

“The U.S. LEI fell to its lowest level since November of 2020, consistent with worsening economic conditions ahead,” said Justyna Zabinska-La Monica, Senior Manager, Business Cycle Indicators, at The Conference Board. “The weaknesses among the index’s components were widespread in March and have been so over the past six months, which pushed the growth rate of the LEI deeper into negative territory. Only stock prices and manufacturers’ new orders for consumer goods and materials contributed positively over the last six months. The Conference Board forecasts that economic weakness will intensify and spread more widely throughout the US economy over the coming months, leading to a recession starting in mid-2023.”

While the decline from March-September 2022 didn’t foretell an immediate recession (and the Conference Board says their coincident index was up 0.2% in March and up over the last 6 months, so we're not currently in one), we’ve also never failed to go under when this situation has happened over the last 22 years.

Some current-time stats are also showing weakness, as we’ve had a decline in each of the last couple of months in retail sales after a big jump in January, which means the total increase for Q1 2023 was an OK-but-not-great 1.7% before inflation.

But like a lot of other things in the last 3 years, there is wide variation among the sectors, both in 1st Quarter changes and over the last year. You can see that bars and restaurants as well as e-commerce outlets are doing very well, but stores that sell home-based products have continued to decline in the last year after the big COVID-influenced increases in 2021.

We also received more evidence of a slowdown in the housing sector, with another report showing residential housing starts and permits both declined in March, and are well below the rates we had a year ago.

Privately‐owned housing units authorized by building permits in March were at a seasonally adjusted annual rate of 1,413,000. This is 8.8 percent below the revised February rate of 1,550,000 and is 24.8 percent below the March 2022 rate of 1,879,000. Single‐family authorizations in March were at a rate of 818,000; this is 4.1 percent above the revised February figure of 786,000. Authorizations of units in buildings with five units or more were at a rate of 543,000 in March.

Privately‐owned housing starts in March were at a seasonally adjusted annual rate of 1,420,000. This is 0.8 percent (±13.0 percent)* below the revised February estimate of 1,432,000 and is 17.2 percent (±9.1 percent) below the March 2022 rate of 1,716,000. Single‐family housing starts in March were at a rate of 861,000; this is 2.7 percent (±14.4 percent)* above the revised February figure of 838,000. The March rate for units in buildings with five units or more was 542,000.

However, that’s a signifier of future work. The big increases in housing activity that we saw in 2021 and 2022 are now seeing more new houses are being completed and available to move into compared to a year ago.

Privately‐owned housing completions in March were at a seasonally adjusted annual rate of 1,542,000. This is 0.6 percent (±13.3 percent)* below the revised February estimate of 1,552,000, but is 12.9 percent (±18.6 percent)* above the March 2022 rate of 1,366,000. Single‐family housing completions in March were at a rate of 1,050,000; this is 2.4 percent (±12.4 percent)* above the revised February rate of 1,025,000. The March rate for units in buildings with five units or more was 484,000.

Which leads to a theory of mine that tells me a “recession” might not be as severe on the job side as previous one, because the data indicates to me that 2021’s rebound was so strong it threw things into shortage for 2022, and now the declines in new orders and housing starts and other indicators have us leveling out into a more balanced situation. So there might not be as much of a need to lay people off since there isn’t an “excess” of labor vs what’s demanded.

Here's a recent article from Wisconsin Public Radio that adds more evidence to this theory.

Low unemployment amid a looming recession sounds counterintuitive, but [UW-Madison Ag and Econ professor Steven] Deller said an economic slowdown is more closely tied to economic output.

"A recession is defined by what's happening to gross domestic product. It really doesn't look at employment levels, but generally those two move hand in hand," Deller said. "So it could very well be that we go into a mild recession, but we keep jobs fairly strong because of the way that we define a recession."

The article also quotes Buckley Brinkman, the CEO of the Wisconsin Center for Manufacturing and Productivity, who says because activity is still higher than the pre-COVID levels and because labor market is tight in that field, it’s not going to be worth it for businesses to lay people off if business slows in 2023.

"Even if we have a downturn — and we've come off of a record high now in terms of manufacturing activity — manufacturers are really slow to allow people to go back into the workforce, because they know there's nobody else there that they can hire to replace them," Brinkman said.

So as the 2nd Quarter of 2023 begins, we may well be in a spot where we see an economic “decline” in activity, but without job losses and a much higher level of output vs 2020. Which means in the real world, most honest people will hear GOP talk of “recession” and not buy it, because they’re still working and making money.

Of course, the GOP could make things a lot more worrysome if they keep screwing around with the debt ceiling and causing stocks to drop due to fear about what those morons might do to financial markets. But if President Biden says “we’re paying our bills regardless of what the GOP does (or doesn’t do)”, and doesn’t allow that sabotage to happen, and if Jerome Powell and other Fed officials stop chasing the ghosts from last Spring and stops jacking rates well above the rate of inflation, then I think we should get through the Spring and Summer 2023 with little apparent damage for real America.

Which would be a nice contrast to the “growth” of 2002 and the first 4 months of 2003, where we allegedly grew out of the 2001 recession, but lost more than 800,000 jobs nationwide. Call me crazy, but I think those that work for a living would take a continued increase in jobs and wages over a higher GDP number.