Old habits die hard: The LEI returns to the red in March

Summary

After increasing for the first time in nearly two years in February, the Leading Economic Index slipped back into the red and declined 0.3% in March. Despite the monthly decline, the index broke above the threshold that is historically consistent with recession.

Monthly decline, but recession light went out

After increasing for the first time in nearly two years in February, the Leading Economic Index (LEI) slipped back into the red and declined 0.3% in March. The teetering is illustrative of rising uncertainty on the path of the U.S. economy in the coming year. Employment growth is solid, yet inflation has proven persistent and is supportive of a "higher-for-longer" interest rate environment. So while capital expenditures and residential construction had shown some signs of life in the opening innings of 2024, a sustained rebound in these interest-rate sensitive spaces may be a little ways away.

Despite the monthly decline in the LEI, the index is no longer signaling a recession. As shown in the nearby chart, whenever the six-month average growth rate of the LEI has fallen below -0.4%, a recession has occurred before the growth rate resurfaced. The index's increase in February and relatively smaller monthly declines over the past few months helped lift it above the recession threshold for the first time since July 2022, without a recession ensuing. The move corroborates the ISM manufacturing index breaking into expansionary territory for the first time in 16 months in March. While other recession bellwethers like the inverted yield curve are still flashing red, the LEI's improvement suggests the economy's underlying strength remains intact even if the pace of expansion is set to moderate in the coming months.

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