12 Reasons Recession is Upon Us?
I’ve bucked the recession calls now for a long while, but I see new recession calls becoming increasingly popular. In a recent update Mike Shedlock offered 12 reasons why economic optimism is unfounded. He says:
- Europe is a disaster.
- US manufacturing is cooling rapidly
- China is cooling rapidly: China Manufacturing PMI 7-Month Low, Sharpest Decline in New Export Orders Since March 2009
- US Monetary policy is at best useless, but more likely net harmful, especially to those on fixed income.
- First year presidential politics are frequently recessionary
- US still needs fiscal tightening
- Unemployment insurance has expired for millions: 200,000 Lose Unemployment Benefits This Week, Nearly Half From California
- Self-Employment desperation: 100% of U.S. Jobs Added Since 2010 Have Been Self-Employment, Contractor, or Other Jobs Without Unemployment Insurance Benefits
- Last two jobs reports have been dismal: Another Payroll Disaster: Jobs +69,000, Employment Rate +.1 to 8.2%, April Jobs Revised Lower to +77,000; Long-term Unemployment +310,000
- The 4-week moving average of weekly unemployment claims is at the highest rate of the year, at 386,250.
- New home sales cannot gain significant traction: New Home Sales Hype vs. Reality
- Tax Armageddon
I’m still bucking the negativity trend for now and I’ll give you one big reason why. My expansion/contraction model has been right on the money for the last 12 months as many of these recession calls have become more pronounced (maybe my time for being wrong is overdue though!). One of the more glaring non-recessionary components of my model is a big one – fixed private investment. In the last 45 years ALL SEVEN recessions have been led by a decline in fixed private investment. The only close call was the 82 recession which was really a double dip.
The Q1 2012 reading was 10% year over year. So if we’re in a recession or on the verge of a recession then fixed private investment must be cratering as we speak. That, or it’s “different this time”. And while I hesitate to say that it can’t be different this time, we have to recognize that economic forecasting is largely a game of playing the odds and the odds of a recession with fix private investment at 10% is extremely low. I think recession is much more likely in 2013 as the fiscal cliff comes to fruition.
Cullen Roche
Mr. Roche is the Founder of Orcam Financial Group, LLC. Orcam is a financial services firm offering research, private advisory, institutional consulting and educational services.
Follow Me:
33 Comments
Two comments:
First, if we look at recessions in 1975 and, especially, in 1982, we would see a recession (per official announcement) starting very close to the peak of growth. It may be similar this time.
Secondly, never before (in the time frame of the chart) have we experienced such drop in private investments as during the last recession. It is possible that the current investments growth into the “possible” new recession indicates prior very low base and resulted underinvestment in critical components.
Thirdly, let’s not forget about the multiples of various stimulus programs. Although, per se, they are not private investments, they certainly help to increase private investments on marginal base.
Cullen,
You say that a recession is more likely in 2013 post fiscal cliff. To be clear, are you taking a position on a recession occurring in 2013?
Also, how is it that the US economy is not in recession when Europe and potentially Asia is in one? I thought the world was too interconnected for a nation to grow while another contracts. And since the US economy is consumption driven (import type based economy) so is the growth and stability that is occurring somehow more locally based. Or is it largely government spending? And if so, any idea which US sectors are benefiting.
I don’t forecast anything more than a quarter in advance. So I’ll preview 2013 when it’s actually close and some closure on the fiscal cliff is here.
The reason the USA hasn’t sunk into recession yet is because we’ve been running massive deficits to offset the deleveraging while much of Europe has not.
Ethan Harris told Bloomberg that fixed private investment is slowing down now through the rest of 2012 in anticipation of fiscal cliff. Usually optimistic Roach(formerly Morgan Stanley, now at Yale) says China & EU slowdowns are hitting USA exports in a major way(article in projectsyndicate)
“6. US still needs fiscal tightening”
Yikes!
Yeah, Mish has read his Keen, but needs to read his JKH on institutional structures and why the US govt isn’t like a household.
Yes, Godley is just as important as JKH.
But it is the institutional structures that help one understand why the USA is a currency issuer and not a currency user. When you understand that banks are harnessed by the govt as agents to procure funds then you understand why auctions never fail and why obtaining funding is never a concern for the US govt. Understanding the flow or funds as described by Godley and Lavoie is secondary to this in terms of necessity regarding the “solvency” debate. But yes, you must logically get to that point to understand this all. JKH’s contribution of S = I + (S-I) is equally important I’d say. In fact, understanding the balance of Investment in this might be the most crucial part of the sectoral balances….
Cullen, do you mean Steve Keen? Dosent he understand the difference between a currency issuer and currency user?
Would not surprise me consider his deflation call. Seems to me that deflation could be avoided by preemptive stililus and bailouts like in China. Which could go on as long as their currency has any value.
Yes, Steve Keen. I have seen Keen say some autonomous currency issuers have a default risk. So no, I don’t think he fully understands these institutional structures.
Yes, the US needs fiscal tightning. Because, as David Rosenberg has said, $ 1 trillion is lost due to all kind of tax loopholes. The US taxsystem is very inefficient. Close all loopholes and taxrevenues will dramatically increase. But those increased taxrevenues can be given back to the taxpayer through lower taxrates.
If a lot of debt/credit related taxdeductions/loopholes are closed, then Wall Street WILL suffer. And that’s the last thing they want.
Cullen, pls correct me if I’m wrong, but I think I read that a flash estimate of 2nd quarter GDP will be coming from the govt either Thurs or Fri this week. My guess is that this estimate will come in about 0.5% less than the 1st Qtr , which was 1.9%. My guess is that growth has slowed to about 1.4% in the 2nd qtr, and will likely slow even further in 3rd qtr. Would you agree that it is fair to say that we are in a growth slowdown, and probably in a time of lower corporate profits as well?
“…will likely slow even further in 3rd qtr. Would you agree that it is fair to say that we are in a growth slowdown, and probably in a time of lower corporate profits as well?”
S&P profit forecasts have been falling rapidly, so that certainly sounds right. And a vicious circle perhaps if, as I expect, companies are going to go more negative than usual on guidance this reporting season.
There just isn’t a lot to be bullish about right now concerning risk assets. A nice EU summit with some good ideas is likely to have the same result that another round of QE would have — a temporary and (although furious) unsustainable rally in risk. The low-growth bus is likely to run over everyone who was standing around looking at the Euro wreck, even though they may pull survivors out of that wreck rather than bodies. In the short term, the growth story is likely to suck, and that sucking sound is likely to persist awhile.
My mistake. I just found out that this Thursday 6/28 the govt will report the final report of 1st quarter GDP, where the prior report showed 1.9%. I guess we have to wait a couple of weeks to get the first report on 2nd qtr gdp.
When will the FPI readings for the current quarter be released?
This chart seemed persuasive… then I began to wonder why it only started in 1967.
So I checked the FRED data as far back as it goes – which is in fact to 1947. There were four recessions in those 20 years. The YOY % Fixed Private Investment figures for each, in the month the recession began, were as follows:
Nov. 1948: 8.8%
July 1953: 14.1%
August 1957: 2.2%
April 1960: 2.1%
Turns out recessions can indeed begin when FPI is extremely positive.
But more important to note is this: the latest FRED datapoint for Fixed Private Investment (10%) is from January of this year. The chart shows how plenty can change in six months. If you’d looked at this chart as each of the above recessions were beginning, and only had the datapoint from six months prior to go on, you would have seen the following:
April 1948: 25.6%
Jan 1953: 6.9%
Jan 1957: 4.5%
Oct 1959: 10.6%
And in 1953 the data kept on improving (to 14.1%) right into the beginning of the downturn. So, in three of the four cases, you could have cited extremely positive data up right up until the onset of each recession. Here’s a link to the full chart:
http://research.stlouisfed.org/fredgraph.png?g=8fM
Perhaps there’s a sound economic or statistical reason why Cullen begins his analysis in 1967. And I’ve no idea whether we are entering a recession now or not. I’m merely pointing out that if we don’t, it won’t necessarily be because this data looks good.
Good analysis, thank you.
You’ve misconstrued my point. I didn’t say FPI had to turn negative or that recession couldn’t begin when it’s positive. I said it turns down LEADING recessions. I didn’t include the 20 years of data before 1967 because it was inconclusive. But upon further review it actually reinforces my point. The only time FPI didn’t turn down before a recession was the 1952 recession.
The 1982 recession was cutting it pretty close, and as OnTheMoney points out, the 2012 number is for January. So the indicator has 8 hits, 1 miss, and 1 close call. Also, I know “this time is different” are dangerous words in economics, but we have ZIRP today, and that really is different. We know events can move really fast in this day and age. So, the jury is still out, and the recession probably will not be called until after the fact anyway.
Cullen, I’m afraid it doesn’t reinforce your point. You are referencing a reading of 10%, but I’m afraid that’s misleading due to the long lag.
You say above: “the odds of a recession with fixed private investment at 10% is extremely low.” That’s correct, with three exceptions: the 1953 (14.1%), 1973/4 (10.3%) & 1981/2 (15.0%) recessions boasted high FPI growth rates as recessions began. Two of those, it may be worth noting, were during a secular bear market.
However neither of us have any idea what the up-to-date reading actually is – you dismiss the possibility that it may “be cratering as we speak”, yet that’s exactly what happens in the six months before every recession. We won’t know that until the latest figures are released in several months time, and even then they’ll be subject to revision.
In other words, while you are largely correct that a decline in FPI growth generally leads peaks in the business cycle, the published data can’t reliably help us identify it. The chart shows a line turning down before each recession begins – but that is simply because we have the benefit of seeing all the data right up until the start of the downturn. We do not have that luxury in June 2012. We’re on a lag.
As I show above, analysts looking at the 1948, 1953 and 1960 data in REAL time – ie. on the same six-month lag with which we’re looking at it today – would have seen growth figures as good if not better than 10% – just as they were entering a recession.
Okay, I should have said that FPI at 10% AND CLIMBING is not consistent with recession. I thought the charts were self explanatory since I circled the downward slopes specifically. Sorry for the confusion.
You know what? I could dig my heels in here and insist that, by definition, lagging data cannot be used as a predictive tool. But since you’re the boss here and you’ll get the last word anyhow, I’ll let you finesse that one and keep shtoom
I’m not infallible and I don’t need the last word. I know I am putting my neck on the chopping block by saying there won’t be a recession. It’s not a comfortable prediction for me. And this indicator certainly isn’t foolproof. I appreciate your skepticism. Honestly. And if I am wrong I am sure I’ll be reminded of this.
Rightfully so.
Currently the Gross Fixed Private Investment is 13% of GDP. In the last 10 years it has been 15-17%. Leading in the last recession it was still 16% in Q4 of 2007. One can argue that it is not currently decreasing because it can’t go much lower. Anyway, I think that one needs to look not only at the private investment but at the government savings and these have been increasing lately (the deficit has been decreasing). The federal deficit has decreased from $1.3T annual rate in Q3 of 2009 to less than $1T in the first quarter of 2012. It looks like premature tightening that cancels the positive effect of the slowly increasing private investment.
If we had data on fixed private investing in the 1930′s, you’d probably find your exceptional data point. Business cycle recessions have different causality than deleveraging induced economic contractions (hat tip to Dalio at Bridgewater on identifying the difference).
Cullen,
you forgot what i think is the most important factor in using gdp components as leading indicators: they are notorious for being revised later, and revised dramatically even many years later. so, in order to see if this was really a leading indicator one has to look at what was the actual print at the time of publication.
Yes BUT a huge deleveraging happened in the shadow banking system and it’s still going on. But the nature of the shadow banking system is seldom analysed, and for economosts like Krugmann and the MMT crew it just doesnt’ exist. Ypes !!! The enity by far the most responsible of the money supply explosion of the bubble(s) era do not exist !!! No, they are not good economists, much more like priests.
I’m not so interested in the debate about recession, if it’s here now or tomorrow. The fact is that despite a 10% deficit for 3 years, economy growth was just 2.5% a year on average (more or less). Furthermore people are employed when they have a reliable 40h/week job so unemployment is not 8% but 15%. The current structure of the western society has killed any real long term economical perspective. Too much money to the 1% of rentiers, no investments in real productive assests (electrical grid and so on). But these facts are totally absent from the debate. So, my opionion, no real growth and long lasting depression.
What about revisions to the data? Is it possible that we will find out that private investment is already in decline say half a year from now?
And regarding the MMT assumption of no default risk on sovereign currency issuer – what about say Russian own currency default in 98?
Shure they could print as well. But they did not chose to. It is credit 101 – credit risk is not only an ability but also Willingness to pay. And if you are not aware there were around 12 defaults by the countries issuing the currency since 1975. So the credit risk due to politics is always there. And saying that US debt has none is just plain wrong. We live in a real world where politics and election cycles play a major role in policy.
I remember that event quite well. One day dollar was 8 rubles next day 12, end of the week 30. Most of the Russian debt was in USD, not RUB
exactly – a currency issuer is not sovereign if it has foreign denominated debt
When you should remember that russia defaulted on rouble denominated debt., which it could pay off by printing. It has never,defaulted on usd denominated debt per se, although there was a moratorium on payments. What is more important is that it could have taxed the population via printing and pay both domestic and foreign debt, wiermar germany style, but again – did not chose to. So you comment regarding foreign debt is off base here.
Here is the real reason recession is upon us… Wall St. and the Banking industy stole everyones money.
How does the demographics of the baby boom moving from spending mode to saving mode fit into all this? It seems to me that the whole point is the private sector drives the economy and if the whole spending gears down over the next few years will we not end up in a recession?