A drop in the U.S. Leading Economic Index for June on Friday confirmed that decelerating growth is likely for the rest of 2019. The LEI ticked down -0.3% in June, following no change in May and ticking up by +0.1% in April.
"The US LEI fell in June, the first decline since last December, primarily driven by weaknesses in new orders for manufacturing, housing permits, and unemployment insurance claims," said Ataman Ozyildirim, Senior Director of Economic Research at The Conference Board. "For the first time since late 2007, the yield spread made a small negative contribution. As the US economy enters its eleventh year of expansion, the longest in US history, the LEI suggests growth is likely to remain slow in the second half of the year."
A collapse in the LEI is a reliable warning that a recession is possible. The LEI is a composite of 10 forward-looking economic benchmarks, including interest rates, business orders, stock market prices, and the employment situation. However, not every collapse in the LEI is followed by a recession. A recession grows more likely only after the LEI collapses month-after-month for many months. June's downtick — the first in six months — could be the precursor to a recession, but the Federal Reserve's policy easing has halted economic stall-outs in the past. For example, in June 1998, an inversion of the yield curve was met with a reversal in Fed policy enabling the 1990s expansion to roll on for nearly three more years. The Fed, on June 4th, reversed its long-held stance that it would continue to hike rates because it expected higher inflation.
The stock market is not acting like a recession is on the way, indicating that investors have faith in the Fed, even after its abrupt policy about-face.
The Standard & Poor's 500 stock of U.S. large companies, after hitting a new all-time high on Monday, closed on Friday at 2,976.61, just shy of its all-time closing high.
With slowing growth, the next few months are likely to be a dramatic pause in the record-long expansion. Corporate earnings estimates may need to be lowered by Wall Street in the weeks ahead, which could cause investors to be less sanguine about stocks. Expect volatility and stay focused on achieving your long-term investment plan.
This article was written by a veteran financial journalist based on data compiled and analyzed by independent economist, Fritz Meyer. While these are sources we believe to be reliable, the information is not intended to be used as financial or tax advice without consulting a professional about your personal situation. Tax laws are subject to change. Indices are unmanaged and not available for direct investment. Investments with higher return potential carry greater risk for loss. No one can predict the future of the stock market or any investment, and past performance is never a guarantee of your future results.
© 2020 Advisor Products Inc. All Rights Reserved.