Most economic indicators are retrospective, meaning they look backward. This includes GDP, unemployment, retail sales and so on. It is for that reason that I pay very close attention to leading indicators, which are more prospective, or forward looking.
This is especially meaningful right now because of the high level of uncertainty in the broader economy.
Two key leading indicators were released this past week. One is the Conference Board's LEI, or Leading Economic Indicator, which has been declining since 2021. It's down 21% since 2021, but the deterioration has been especially pronounced since January.
The LEI includes various components like unemployment claims, new manufacturing orders, building permits, and a stock market index. All components either decreased or stayed flat in last month's index, with consumer expectations falling the most.
That brings me to the University of Michigan Consumer Sentiment report, which has also trended down since 2021. This is notable because economic growth remained above trend until Q1 of this year -- when GDP contracted by minus-0.3%, as I discussed in an early May article.
Like the LEI, consumer sentiment has dropped more sharply in recent months and is now 30% lower than in January. Interestingly, the preliminary May report showed a 7% drop among Republicans, which isn't typical when the incumbent president is of the same political affiliation.
Sign up for free: Gazette Business Receive a weekly roundup of business news around El Paso County.
Sign Up View all of our newsletters. Success! Thank you for subscribing to our newsletter. View all of our newsletters. Featured Local Savings
The overall decline in the index stems from weakening incomes, largely tied to tariffs, which were cited by nearly 75% of respondents. It is precisely tariffs that have year-ahead inflation expectations at 7.3%.
Imagine if prices are 7% higher in a year! Both Democrats and Republicans expect high inflation, but longer-term expectations rose the most among Republicans. Survey responses included the period of full and paused China tariffs, so we may see a slight uptick in the final index with more late May responses.
As I mentioned last week, current average tariff rates are about 15%, even with pauses on China and other major trade partners. That's a stark change from the 3% to 5% range we had from 1950 until recently.
Consumers understand this -- likely because they've felt high prices since 2021, which is precisely when price increases took off and these economic indices took a nosedive.
All in, I can't remember the last time uncertainty was this high and consumers were this gloomy other than the pandemic. But consumers bounced back quickly then, and this time pessimism seems more entrenched. This is probably because every day we are reminded of higher prices, and that seems to be trumping all other economic indicators.