U.S. Leading Economic Index Signals Slower Growth, Not Recession

The U.S. economy is slowing, but it is not collapsing. That is the story emerging from the September 2025 release of the U.S. Leading Economic Index® (LEI). LEI, published by the Conference Board, is one of the most widely followed gauges of where the U.S. economy is headed. It aggregates ten forward-looking indicators—including consumer expectations, manufacturing orders, labor market signals, and financial conditions—to identify economic turning points months before they appear in GDP or employment data.

In its September 2025 release, the LEI declined 0.3% to 98.3, extending a year-long pattern of gradual deterioration. The index is normalized to a value of 100 in 2016, meaning current readings reflect relative economic strength or weakness compared with that base year. Over the past six months, the LEI has fallen 2.1%, a faster pace of weakening than the 1.3% decline recorded in the prior six-month period.

The message from the index is increasingly clear: momentum is slowing. The more important question is how serious that slowdown is—and what it implies going forward.

How to Read the Signal: Fragile, Not Failing

Economists typically assess recession risk along three dimensions: diffusion, depth, and duration. Together, these measures help distinguish between a temporary slowdown and a transition toward contraction.

- Diffusion index: below 50% (more than half of components now weakening, signaling significant broadening of stress)

- Depth: Moderate by historical standards (six-month annualized decline −2.1%)

- Duration: Increasing (more than a year of weakening)

Historically, the LEI has been a reliable early warning system, leading recessions by roughly seven months. Yet this decline does not meet the usual thresholds for a full-blown contraction—unlike the sharp drops exceeding -4% seen before the 2008 recession. Only three of the ten components advanced over the recent six months, but financial conditions remain supportive.

In short, the economy is vulnerable, not broken. Growth continues, but resilience is declining.

Think of it as a yellow light: slowing momentum that signals caution. Ignoring it may be costly, but the economy is not yet in a red-light scenario.

Why Consumer Sentiment Is Dragging the Index

Consumer expectations have been the single largest negative contributor to the LEI in recent months. The average consumer expectations for business conditions component ranked among the steepest drags in the September release.

Surveys from the University of Michigan and the Conference Board—two of the most widely followed measures of household sentiment—show growing pessimism around future income, job security, and affordability. The Consumer Confidence Index fell to 88.7 in November, a 6.8-point monthly decline and its lowest level since April 2025, indicating that sentiment deterioration has continued beyond the September LEI snapshot.

Why this matters: weak sentiment does not immediately collapse spending, but it tends to reshape behavior at the margin. Large discretionary purchases are delayed and households become more sensitive to adverse news. Consumer expectations, in this sense, act as a leading indicator for real demand—often weakening before spending data visibly rolls over.

Manufacturing: Narrowing, Not Collapsing

Manufacturing activity remains soft. The Institute for Supply Management’s Manufacturing Purchasing Managers’ Index (PMI) registered 49.1 in September, marking the seventh consecutive month below the 50 threshold that separates expansion from contraction. New orders remain weak, signaling subdued industrial momentum.

Yet the picture is not uniformly negative. Nondefense capital goods orders (excluding aircraft)—often linked to AI, automation, and data infrastructure—were one of only three positive contributors to the LEI in September. Businesses are still investing, but growth is increasingly concentrated in a few sectors.

The takeaway: the economy has fewer engines driving expansion. Concentrated growth reduces its ability to absorb shocks, increasing vulnerability to sector-specific downturns.

Labor Market: Cooling Without Cracking

Labor market indicators embedded in the LEI point to moderation rather than distress. Average weekly hours have edged lower, and initial unemployment claims have risen modestly, but neither suggests systemic strain. Manufacturing workweeks remain steady at 39.9 hours.

Firms appear to be adjusting through reduced hours and tighter margins rather than broad-based layoffs. Historically, declines in hours worked tend to precede employment cuts, making this an early—but not definitive—late-cycle signal. The current pattern is consistent with a controlled slowdown rather than a recessionary collapse.

Financial Conditions: The Stabilizing Force

Financial conditions remain the key counterweight to broader economic weakness. Rising equity prices and supportive credit conditions—captured by positive contributions from the S&P 500 stock price component and the Leading Credit Index—were among the few bright spots in the September LEI release.

These financial buffers help sustain activity by supporting household wealth, easing funding conditions, and maintaining risk appetite. However, they are inherently fragile. A sharp equity correction, widening credit spreads, or external shocks—such as trade disruptions or tariff escalation—could quickly reverse this support and amplify weakness across the index.

For now, financial conditions are keeping the economy balanced at a yellow light.

What to Watch Next

Whether the slowdown remains contained or escalates will depend on several key indicators:

1. Consumer behavior: If declining confidence begins to translate into weaker real spending, downside risks increase.
2. Credit spreads: Sustained widening would signal rising financial stress.
3. Policy shocks: Fiscal uncertainty or renewed trade tensions could further erode sentiment.
4. Data gaps: Recent government shutdowns delayed several economic releases; missing or lagged data can obscure early warning signs.

Monitoring these signals will be critical for business planning and market positioning in the months ahead.

Policy and Market Implications

The LEI’s message supports a posture of caution rather than urgency. Weakening consumer expectations and softening orders argue against further monetary tightening, while still-supportive financial conditions reduce the immediate need for aggressive easing.

For markets, the risk profile is asymmetric. Upside surprises are becoming harder to generate, while sensitivity to negative shocks is increasing. Confidence indicators and financial stability metrics are likely to matter more than headline growth numbers in the near term.

Outlook: Moderation, With Less Margin for Error

The Conference Board projects U.S. GDP growth of approximately 1.8% in 2025, slowing to around 1.5% in 2026. The LEI is broadly consistent with that outlook: expansion is likely to continue, but with a shrinking margin of safety.

1. Base case: Moderating growth persists, supported by stable financial conditions and targeted business investment.
2. Downside scenario: Policy shocks, sustained sentiment deterioration, or financial repricing could tip the economy into a mild contraction.

Growth is still occurring—but the economy is no longer robust enough to absorb repeated shocks without consequence. The signal is yellow, and the warning is clear.