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Posted May 19, 2025 at 10:45 am
In recent years, the economic landscape has presented a complex picture. Coincident and lagging indicators have been telling a positive story, reflecting healthy realized data and robust economic performance. Real US GDP growth has remained around a healthy 3% over the last couple of years. However, leading indicators had been painting a different picture, showing a downward trend since 2022. This divergence is unusual, as historically, leading and coincident indicators have generally moved in the same direction, albeit with different magnitudes.
Despite the recent poor sentiment stemming from tariffs, the downward trend in the leading economic index started a few years back. Elevated interest rates since 2022 could be a reasonable explanation for this divergence. The current Federal Reserve policy rate stands at 4.5%, with the most recent Consumer Price Index (CPI) print coming in at 2.3%. This means that real rates remain around 2%, which is generally considered restrictive. Yet these high rates haven’t been the headwind expected.
Over the last few years, the Federal Reserve has continually delayed the rate cuts that investors had been expecting, primarily because the realized data has been quite healthy. Despite the negative signals from leading economic indicators, the economy has shown resilience, maintaining steady growth. The question remains: at what point will these trends converge, and what will it take for them to at least be going in the same direction.
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Originally Posted on May 19, 2025 – Weekly Market Update: Divergence in Economic Indicators
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