April 2019 - Is a Recession Coming?

David L. Johanson |

SUMMARY

  • The Expansion may not be over.
  • 10 leading predictors of economic activity.

“A recession is coming!  A recession is coming!”

Well, that’s not quite what Henry Wadsworth Longfellow penned, but given the seemingly non-ending talk about a recession, you might think that some Economists are channeling Paul Revere’s midnight ride.

Yes, a recession is eventually coming.  The question is, is it imminent?  It feels as though the media and short-term traders have become hypersensitive to any signs that a recession may be looming.  In fact, a quick review of Google Trends provides the answer.  Google searches for the word “recession” have jumped 61% over the last six months versus the previous five years.

Recessions are a part of the business cycle in a free market economy, but expansions don’t simply peter out.  Expansions come to an end when economic and financial imbalances arise, such as a stock or housing bubble, or the Federal Reserve aggressively hikes interest rates in response to a spike in inflation.

That brings us to the title of this month’s newsletter.  Let's talk about it.

What is a Recession?

The typical definition of a recession is two consecutive quarters of negative real (inflation-adjusted) GDP.  Officially, an organization called the National Bureau of Economic Research (NBER) has become the arbiter of recessions.  Founded in 1920, they are a private, nonpartisan organization dedicated to conducting economic research.

The NBER defines a recession as “a significant decline in activity spread across the economy, lasting more than a few months.”  It manifests itself in the data tied to “industrial production, employment, real income, and wholesale-retail sales.”

For example, during a recession we’d expect to see declining retail and business sales.  This would lead to a decline in industrial production and a rise in the unemployment rate.

Why Do We Care About Recessions?

There are plenty of reasons.  We all worry about job security as layoffs rise and it becomes much more difficult to find work.

For investors, it’s a time of heavy uncertainty.  Bear markets (a 20% or greater decline in the S&P 500 Index) are typically tied to recessions, as corporate profits decline, and companies warn about the future.  Bear markets last 14 months on average.

What Does Johanson Financial Advisors Analyze?

Economists have always had trouble forecasting an upcoming recession.  A few get it right; most miss it.  It is difficult to interpret data, but we still do our own independent thinking.  Here are our warning signs.  

These are the 10 leading predictors of economic activity we review:

  1. Average weekly initial claims for unemployment insurance
  2. Building permits for homes
  3. 500 common stocks
  4. 10-year Treasury Bond less federal fund rate (yield curve inverts)
  5. Average weekly hours for manufacturing
  6. New orders for consumer goods and materials
  7. The ISM® Index of New Orders
  8. New orders for nondefense capital goods ex-aircraft
  9. Average consumer expectations for business conditions
  10. Leading Credit Index

Some of the categories are less familiar than others, but they can foreshadow future economic activity.  They do give out false recessionary signals at times, so that makes timing difficult.

We Are Still Cautiously Optimistic

These indicators have correctly signaled a slowdown in the economy as of late, but they have not signaled a recession.  The Federal Chair, Jerome Powell, and the Federal Reserve have pivoted on their interest rate increase plan, which has made a huge difference in confidence.

Recessions have typically been preceded by major economic imbalances, such as a stock market bubble or housing bubble.  Or, a sharp rise in inflation projection forces the Federal Government to aggressively respond by raising interest rates to slow down inflation.

For the most part, neither conditions are currently present, lessening odds a near-term recession is forthcoming.  Further, the 2019 market action has been impressive.  It’s not as if we won't see some volatility, but year-to-date performance isn’t signaling a recession is imminent.  The 2019 Q1 S&P 500 performance was the best in ten years.  Of course, that came after Q4 in 2018, which was the worst quarter in ten years.  That's why you never get too depressed on the dips.

It is a great honor to assist you through all your financial travails.  Your trust and confidence are not taken lightly, as we attempt to do everything we can to lighten you load.  Please feel free to call us any time with questions.