An often-overlooked economic gauge showed on Friday that the US economy is headed for recession – or already in one – as the Federal Reserve tries to curb inflation and a series of rapid interest rate hikes.
The Conference Board’s index of economic indicators showed that conditions worsened further in October, with the gauge down 0.8% from the previous month. This follows a 0.5% decline in September.
“America’s LEI has fallen for the eighth month in a row, suggesting that the economy is doing well,” said Ataman Ozyildirim, senior director of economic research at the Conference Board.
The decline reflects a worsening outlook among consumers, who are increasingly concerned about rising interest rates and inflation, as well as a prolonged slowdown in the housing market.
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There is a growing expectation on Wall Street that The Fed will cause a recession as it raises interest rates at the fastest rate in three decades to catch up with runaway inflation.
Officials this month approved a fourth consecutive 75-basis-point rate hike, raising the federal funds rate to 3.75% to 4% – near the threshold levels – and showed no signs of stopping the rate hike.
In a troubling development, the Fed’s rate hikes have so far failed to curb inflation: The government reported this month that the consumer price index rose 7.7% in October from a year ago, hovering near a 40-year high.
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That indicates that the Fed will have to chart its aggressive course, raising the possibility that it will crush consumer demand and cause unemployment to rise.
“Let me say this,” Fed Chairman Jerome Powell told reporters earlier this month. “It’s too early to think about a pause. When people hear lags, they think about a pause. It’s too early, in my opinion, to talk about pausing our promotion. We have a way to go.”
Rising interest rates tend to create higher rates for consumer and business loans, that is it slows down the economy by forcing employers to cut spending.
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Economic growth has contracted in the first two quarters of the year, with gross domestic product – the broadest measure of goods and services produced in a nation – running 1.6% in the winter and 0.6% in spring.
However, it picked up again in the summer, with GDP growing by 2.6% annually in the three-month period from July to September.