There is a general downward trend of economic data. Many are forecasting a recession in 2019. I am not convinced that the downward momentum will lead to an economic contraction. This post also reviews the major economic releases issued this past week - although several scheduled releases including factory orders, international trade, and wholesale trade were victims of the government shutdown.
Calling a recession gets people's attention. There are legitimate signs that a recession COULD be around the corner. But boys and girls - the reality is that we are in a "New Normal" - and I do not trust many historical recession flags. As I am a firm believer in the idiosyncrasies of the "New Normal", I do not like to look at data much earlier than 2000. But there have only two recessions since 2000, so at times I do look at data back to 1990 which brings the total up to three recessions.
Consumption / Income
The consumer is still consuming - and the ratio between spending and income remains about average to the levels seen since the Great Recession. In real time it is difficult to use consumer spending or other consumer habits as a recession flag. When most consumers are spending all they make, the only way spending slows is if consumers earn less. And sharp dips in earnings (and hence spending) occur only after a recession has started.
Seasonally Adjusted Spending's Ratio to Income (an increasing ratio means Consumer is spending more of Income)
Consumer spending is not a reliable tool to forecast recessions - but does indicate a recession once one starts.
Employment growth starts slowing many months (years) before a recession is called. The problem is that employment growth is not accurate in real time - and is revised by the BLS many months (years) after the data is first issued. Still the rate of growth for employment has been in an uptrend since October 2017.
I see no reason to believe a recession is coming soon when the year-over-year growth rate of employment is improving (i.e. employment is accelerating)..
Rail transport has been strengthening over the last few weeks - and now is strongly in expansion. The intuitive sectors (total carloads removing coal, grain and petroleum) expanded 8.4 % year-over-year. We primarily use rolling averages to analyze the intuitive data due to weekly volatility - and the 4 week rolling year-over-year average for the intuitive sectors improved from +0.2% to +2.4 %. The following graph compares the four week moving averages for carload economically intuitive sectors (red line) vs. total movements (blue line):
I have been following transport movements since 1971 - and have used the data to forecast recessions. Unfortunately, in the "New Normal", rail has been an imperfect forecasting tool to predict recessions. Having said that, it is illogical to believe a recession is coming if rail volumes are improving.
Our Economic Index
The Econintersect Economic Index for January 2019 significantly declined, and is now below territory associated with normal expansions. This is a departure from the previous three months where the index's growth rate was little changed. We are seeing mixed trend lines - which usually happens when there is an overall reversal in trends. The graph below plots GDP (which has a bias to the average - not median - sectors) against the Econintersect Economic Index.
Since this forecast was issued, several data sets improved. There is support for the economy at the current levels.
In the minutes for the FOMC's 19 December 2018 meeting:
... Various factors that could pose downside risks for domestic economic growth and inflation were mentioned, including the possibilities of a sharper-than-expected slowdown in global economic growth, a more rapid waning of fiscal stimulus, an escalation in trade tensions, a further tightening of financial conditions, or greater-than-anticipated negative effects from the monetary policy tightening to date. ...
There is little question that both major and minor economies are slowing. It is even believed that Germany, the kingpin of Europe and the fourth largest economy in the world, has entered a recession.
Does international economic growth significantly affect the U.S. economy? My position is that a decline in exports are not a big enough contributor to GDP to trip the U.S. economy into a recession unless it was headed that way anyway.
In the "New Normal" - anything is possible. I would not be surprised if the economy did unanticipated things. The data suggests the economy is moving along - but could be better. But it is getting harder to point to recessionary elements in the data - EXCEPT for the downward trend of the yield curve slope. What does worry me is the government shutdown where data is not being aggregated. It is hard to run a country, and analyze wtf is going on, if you have no information on what is going on.
Economic Releases This Past Week
The following table summarizes the more significant economic releases this past week. For more detailed analysis - please visit our landing page which provides links to our complete analyses.
Other Economic Release Summary For This Week
|Release||Potential Economic Impact||Comment|
|November Factory Orders||n/a|
Not issued due to the government shutdown
|November International Trade||n/a||Not issued due to the government shutdown|
|November JOLTS||Little economic affect|
The year-over-year growth rate of unadjusted private non-farm job openings slowed relative to last month. The rate of growth is about average seen in 2018 - and it is predicting insignificant slowing (likely not noticeable) in the employment situation.
|November Consumer Credit||Credit growth slowing slows economic growth|
There was slowing of growth - and this was on top of a significant downward adjustment of October's data. Note that if one removes student loans - and adjusts for inflation - then there is little year-over-year growth.
November FOMC Meeting Minutes
The Fed stated:
With an increase in the target range at this meeting, the federal funds rate would be at or close to the lower end of the range of estimates of the longer-run neutral interest rate, and participants expressed that recent developments, including the volatility in financial markets and the increased concerns about global growth, made the appropriate extent and timing of future policy firming less clear than earlier.
You tell me if the Fed will raise rates again.
|November Wholesale Trade||n/a|
Not issued due to the government shutdown
|December Consumer Price Index||little affect|
Year-over-year inflation rate was 1.9 % year-over-year (lower than the 2.2 % last month). The year-over-year core inflation (excludes energy and food) rate was unchanged at 2.2 %, and continues to be above the target set by the Federal Reserve. Energy was the main driver for the year-over-year decline.
|Surveys||n/a||This week there was ISM & Markit service s survey and the NFIB Small Business Optimism. The ISM & Markit surveys both came in weaker than last month - but well into territory associated with economic expansions.|
|Weekly Rail Counts||Signs economy is slowing||The rolling averages and the year-over-year growth is improving and in expansion. There is a correlation between rail growth and economic growth.|
It is hard to spot positive developments this week.