The Week In Review: Getting Ready for the 2019 Recession?
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.
Potential Economic Impact
November Factory Orders
November International Trade
November Consumer Credit
November FOMC Meeting Minutes
November Wholesale Trade
December Consumer Price Index
Weekly Rail Counts
It is hard to spot positive developments this week.