Three Major Indicators Suggest Recession Not Near
While many now fear that a major economic slowdown or even a recession may be on the horizon, the way to decide this is to actually look at the key economic data.
Whenever we see a move in the markets like we did in the final quarter of 2018, many people sense that real trouble must be brewing and perhaps may jump off or lighten their exposure in anticipation that things may get worse.
While economic slowdowns are not good for stocks, who crave economic growth of at least a modest amount, the real fears out there have to do with the prospects of true slowdowns, the kind we call recessions, where growth goes into the negative for at least 2 consecutive quarters.
At least some of this is relative. For instance, China just released their latest economic data and its current growth rate of 6.5% was the smallest number in years and is causing quite a bit of concern.
In this case though, we could put this down to the market pricing in the higher growth rates that they have come to expect from the Chinese economy, and getting disappointed, even though 6.5% would be a number no other country could even dream about, or perhaps not even want to.
This is why we can’t just look at numbers alone, as we also need to look at the forecasts and see how they measure up to what we thought might happen. While the raw numbers usually have to be taken in context, if they simply are terrible, these low numbers in themselves can drive things.
Something as dramatic as a recession would certainly upset the apple cart, and therefore the prospects of this happening are something we need to be well aware of as we look to anticipate where things may be headed.
Three Major Indicators That Suggest Strength
We can look at three important economic indicators though that tell us that we need not really be that concerned here, which are bond spreads, the job market, and the business credit market. If none of these are telling us that we are in for real trouble, we probably aren’t.
Normally, shorter term bonds have lower yields than comparable longer-term ones, and the primary reason for this is the expectation of inflation. Inflation devalues bonds, not just the principal but the yields as well, as a certain yield is worth less as inflation rises.
In the presence of inflation, driven by economic growth generally, yield spreads between shorter and longer-term bonds increase, and as growth slows down, they decrease, even getting to the point where the yield may be lower with longer-term instruments, due to expectations of deflation.
When spreads narrow enough, and especially when they invert, then we’ve got a clear sign that there may be something amiss, and that something is an expectation of reduced growth. While there are many that seek to predict these things, the trillions of dollars in the bond market perhaps speaks the loudest and is also perhaps the most informed, since they cannot afford to be too wrong given how much is on the line.
The current spread between the 2-year and 10-year U.S. treasury bond is currently at 17 basis points, which isn’t particularly bullish but isn’t really that bearish either. We are also up from the 13-basis point spread we had on Dec. 3. Using spreads is such a good indicator because turnarounds here generally precede ensuing stock market declines, it gives us early warning of such things.
If we see this invert, then we know that this is much more likely time to give this some real pause for thought, but it is holding up right now.
Unemployment data is an obvious choice if we’re looking to get an idea of where business conditions are heading, and like most things related to investing and the economy, we do see trends here develop on both sides.
When jobless claims go up, beware. Jobless claims are now at the lowest point in 50 years, which isn’t exactly concerning. Many people pay close attention to this data and it is among the most paid attention to U.S. economic data out there, and not without good reason. We’re getting both thumbs up with this one.
Another important thing to watch as we look to monitor growth or contraction is the amount of credit that is extended to business generally. There are two main components to this.
Business Borrowing Remains Strong
When businesses are able to borrow more, this suggests more economic prosperity. Businesses have to merit the extending of this credit and the more they merit, the more positive this indicator is.
There’s also the fact that more borrowing is in itself expansionary, because of the effect of this on money supply. The greater the money supply, the more people have to spend generally, both businesses and people, and more spending equals more economic growth.
This is why the Fed keeps such a tight rein on money supply through its activities, and like controlling interest rates, the primary goal is to keep growth in check. Reducing the money supply accomplishes this, while increasing it increases growth.
These credit conditions remain positive and encouraging and this is a third major reason to believe that economic recession isn’t on our doorstep or even in the neighborhood at this point in time.
Analysts at Citi are relying on this and other similar information to predict a 14% gain for the S&P 500 in 2019, and that’s not unreasonable either. Others may be thinking about losses of this much or greater, and while there is a time and a place to flee markets, our expectation of success here needs to be based upon the facts, the best ones we have at the time in fact.
We never know these things or anything about investments with any certainty, and it’s still a guessing game, but we need to make sure our guesses are as educated as possible. Currently, we don’t really have enough negative facts to have us worrying about such things, at least for now, but we always need to keep both our eyes and our minds open.
Editor, MarketReview.com
Robert really stands out in the way that he is able to clarify things through the application of simple economic principles which he also makes easy to understand.
Contact Robert: robert@marketreview.com
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