Updated Published Friday, March 17, 2023 at: 7:50 PM EDT

Four medium and small sized U.S. banks required Federal regulators to take over management of their operations and assets or shore up their depositor bases since March 7, casting new uncertainties over the investment outlook. The threat to the banking system complicated the Federal Reserve’s aggressive yearlong monetary tightening campaign to choke off inflation without triggering a recession.

The confluence of a banking crisis as the Fed’s following eight hikes in the Fed funds rate in the past year has unnerved the stock market and made short-term Treasury bills yields higher than 10-year Treasury bond yields, which is another strong reason to expect a recession in 2023.

Amid the ominous financial economic backdrop, on Friday The Conference Board (TCB) said the Leading Economic Index (LEI) for the U.S. fell again by 0.3% in February, after also falling by 0.3% in January, marking its eleventh consecutive monthly decline. Tracked monthly since 1978 and bi-monthly since 1967,  the LEI is a highly reliable predictor because it collapsed months before every recession in modern U.S. history – except the Covid-19 recession, which was a 100-year anomaly.

The economics team at TCB, a think tank and lobby group, said in a briefing for C-suite executives at Fortune 1000 companies on Wednesday, March 15, a recession in 2023 is highly likely. This was clearly bad news, and Friday’s new LEI report further strengthened the case for a recession and an extension of the bear market in stocks that started in mid-June 2022.

However, on Thursday, March 16, the Atlanta Fed GDPNow model estimated the U.S. economy would grow 3.2% in the current quarter ending March 31, 2023. GDPNow is constructed and tracked by staff economists at the Atlanta Fed to show what’s happening in the economy in real-time. While other U.S. economic growth indicators reflecting the effects of the banking crisis on the economy will not be reported until April, GDPNow is the only real-time publicly available indicator of current economic activity. After adjusting for this week’s retail sales report and labor market data, the 3.2% growth expected in the first quarter GDPNow index contradicts the usually reliable recession indicators. 

Stock and bondholders are paying a price in the form of investment losses. Criminal as well as civil charges against the banks and their top executives are reportedly being considered by Federal regulators. To be clear, bailing out stock and bondholders would be a moral hazard. They knew the risks of stocks and bonds. However, guaranteeing depositors with more than $250,000 in bank saving accounts will not suffer losses is not the same. Savings in banks are expected to be safe so guaranteeing assets beyond $250,000 is not creating a moral hazard to bank depositors. The two-faced U.S. economic news comes down to this: the banking crisis, while not to be dismissed, is not a systemic threat to the U.S. financial system.

The S&P 500 stock index closed Friday at 3916.64, down -1.10% from Thursday, and up +1.43% from a week ago. The index is up +75.05 from the March 23, 2020 bear market low and down -18.34 from its January 3, 2022 all-time high.

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