First of all, the pundits are 100% correct. We are indeed headed for a recession! In fact, we are always headed for a recession, and we are always headed for an expansion. I.e., the economy is cyclical. The question is, are we headed for a recession anytime soon? I love this question, because it allows me to break out my charts!
But before I do, I have an observation to make: Whenever the market's in correction mode, recession calls seem to come screaming out of the woodwork. I just Googled "recession predictions in 2011"; 2011 was the last time we had a legitimate correction (and it was deeper than this one, so far). Here's from the first page:
"And Now Here Comes The Recession of 2011" 8/20/11
"A Recession Forecast That Has Been Reliable Before" 10/8/11
"Forecast says double-dip recession is imminent" 11/25/11
"U.S. Economy Tipping into Recession" 9/30/11
"Economist who Predicted Recession Warns of Worse Crash" 9/18/11
"This Economist is Forecasting Recession --- And He's Never Been Wrong" 10/4/11 (this one's my favorite!)
Now is that right (that down markets bring out the doomsayers), or is there always an abundance of recession calls?
Just Googled recession predictions in 2012 (market trended higher). Here are the first page headlines that called (or sort of called) a recession:
"The 2012 Recession: Are We There Yet? 9/13/12 (this was from a 2011 frustrated forecaster)
"A New Recession Seems Inevitable" 2/24/2012 (could still be licking wounds from 2011 market correction)
"World Bank Warns of Global Recession" 1/17/12 ( " )
"Is U.S. Already in A Recession?" 10/1/12
So there were 4 that I can identify as recession calls. Although two felt like 2011 hangovers.
How about 2013, a hugely positive year for stocks:
"60% chance of another global recession" 6/12/13
"U.S. Economy Will Fall Into a Recession" 8/7/13
Just two first-page hits that I can call true recession calls.
Hmm....
Oh, and by the way, they all happened to be wrong! So I guess the next recession prediction headline referencing the guy from the 10/4/11 article would have to read "This Economist is Forecasting Recession --- And He's Only Been Wrong Once". Or, more likely, "Been Wrong Five Times", since four years have passed without recession since his first miss.
Now, to clarify, my glasses are anything but rose-tinted! I am fully aware that recessions are an inevitable and all-important phase of the economic cycle. I have to be, for it's during such times that we rotate portfolios more to the "defensive" sectors that tend to do the best, or lose the least, during economic downturns.
I am also fully aware that during election years it's not just the economy that gets called into question---adding to the malaise---it's the future of the "American way of life" (which of course exacerbates the pessimism). Which gets defined for us by, this time in particular, an amazing assortment of political opportunists and propagandists---from both sides of the aisle---before they attempt to scare us into thinking that their dream of America is being stolen away by, say, capitalists or immigrants.
Hmm.... America, of all places, being taken down by capitalists and immigrants... Fascinating!
Here's much of the data I track that informs my view of where we sit in the business cycle (red shaded areas are past recessions). On most of the charts I circled where the indicator sat during the 2011 false alarm. I colored the font for each title to denote my interpretation of the economic signal it is currently sending:
Click each, wait a second, then click again to expand...
Consumer Confidence:
Retail Sales (brick and mortar):
Retail Sales (online):
Auto Sales:
Housing Permits:
Housing Starts:
Mortgage Purchase Apps:
Homebuilder Optimism:
NFIB Small Business Optimism:
NFIB Small Business Hiring Plans:
Weekly Jobless Claims:
Institute for Supply Management Manufacturing Sector Survey:
Institute for Supply Management Non-Manufacturing (services) Survey:
Chicago Fed Financial Conditions Index:
Chicago Fed National Activity Index:
Cleveland Fed Financial Stress Index:
Kansas City Fed Financial Stress Index:
St. Louis Fed Financial Stress Index:
Index of Leading Economic Indicators:
High Yield Credit Spread:
TED (treasury/eurodollar) Spread:
The 2s/10s Spread (yield curve):
Industrial Materials Prices:
Oil Price:
Aside from illustrating that in many instances the 2011 recession calls (and we're still waiting) were more justified than today's, the charts tell us that there is indeed a heightened level of stress in the credit markets and weaknesses in the manufacturing sector---that are largely due to an epic bear market in oil and industrial commodities, as well as the negative effects of a strong U.S. dollar. These are the data that those who are predicting recession are legitimately clinging to. While I too am troubled by that data, the signals coming from the services sector and virtually everything consumer suggest (for now) that the odds of a near-term U.S. recession remain low.
Ironically, the source of much of the pessimism is in my view one of the strongest indications that the economy is safe for now: I.e., as the last chart illustrates, U.S. recessions simply (historically speaking) do not begin amid low oil prices. Of course the next one could be the first...
While, I promise, we will eventually get to the next recession, in the long-run I think Brian Tracy got it right:
"If you want to be known as a great economist in America predict growth. If you predict growth you'll be right seventy percent of the time, and if you're wrong temporarily you'll be right pretty soon."
As for the possibility that one's politics might cloud one's perspective, Paul Simon and Art Garfunkel (The Boxer) had their suspicions:
"A man hears what he wants to hear and disregards the rest."
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