It’s impossible to determine if an economy is sliding into a recession until after it has already occurred. This is affirmed by a lesser known marker that compares two individual measurements of consumer sentiments. This was not referred to by Chairperson Jerome Powell in his press conference on Wednesday, however it seems likely that he and other members of the Federal Reserve Board know about it.
Incidentally, Powell gave the impression of somewhat modifying his prediction of a “soft landing”, claiming it may be “a possibility” and doesn’t surmise it to be the standard outlook. This gauge is formed by subtracting the Index of Consumer Sentiment from the University of Michigan from the Consumer Confidence Index from the Conference Board. It is evident that recessions have preceded a sharp growth in the gap between the two indexes since 1979, which is the farthest back that monthly figures exist.
In December 2020 the divide peaked at 49.3, yet now it is at 36.6; a decrease of 12.7. Historically when a recession has arisen, the difference has decreased by an average of 9.7. Not considering the pandemic as an outlier, all the other periods of recession have followed after this spread greatly increased then decreased.
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