The Federal Reserve and many financial pundits are hoping for a soft-landing; a condition where real growth falls below trend rather than goes negative (a recession) after an economic boom cycle. Take these predictions with a grain of salt because they are a trope before nearly every recession since 1973. The combination of optimistic human nature and the Federal Reserve not wanting to create a self-fulfilling prophecy by mentioning a recession, make soft-landing predictions common towards the end of economic booms like now1. The soft-landing narrative has been spurred-on recently because a recession hasn’t arrived yet and inflation has fallen. Just because a recession hasn’t happened yet, does not mean it won’t. Inflation has fallen because it was high from the pandemic; it isn’t evidence that the business cycle has been skipped.

While soft landings do happen rarely (1966, 1985, and 1995), they don’t when the Conference Board’s Leading Economic Index (LEI) has fallen as much as it has. Its 60+ year track record suggests that a recession is coming.

The LEI, released this morning for October (down another 0.8%), has now fallen a large 11.8% from its most recent peak and is down 6.7% from before the pandemic. This index is comprised of 10 indicators including the yield curve (10yr minus Fed Funds), initial jobless claims, building permits, and the S&P 500 stock market index and goes back to 1960. Soft landings have small drawdown troughs in the 1-2% range, where recessions are in the 5% or more range (see chart below.) With LEI already down nearly 12% from its recent peak before a recession has begun (it will presumably fall more during a recession), a soft-landing is far-fetched.

1The end of an economic boom is reliably signaled by the yield curve inverting then de-inverting, leading indicators falling dramatically (as above), the Fed pausing after a multi-year rate rise cycle, initial jobless claims rising, and the unemployment rate rising. All of these are happening now.