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A Quick Note on the Odds of a US Recession
As of Friday, the US stock market is down again, losing about 6% for the new year in total. And the most current economic reports are pretty lousy, nudging big banks to lower their GDP forecasts. Here is JPMorgan:
We are lowering our tracking of real annualized GDP growth in Q4 from 1.0% to 0.1%. Two reports out today contributed to this downgraded assessment. First, retail sales in December came in rather shockingly weak, which was accompanied by modest downward revisions to October and November retail sales. Second, the business inventories report for November suggest a fairly aggressive push by business to reduce the pace of stockbuilding last quarter. We now see inventories subtracting 1.2%-points from growth last quarter, offset by a disappointing but not disastrous 1.3% increase in real final sales.
We are also lowering some our outlook for Q1 GDP growth from 2.25% to 2.0%. While the inventory situation should turn to being roughly neutral for growth, the quarterly arithmetic on consumer spending got a little more challenging after this morning’s retail sales figure, which implies flat real consumer spending in December. We now see real consumer spending in Q1 at 2.5%, versus 3.0% previously. We are leaving unrevised our outlook for 2.25% growth over the remaining three quarters of the year. We will discuss in a separate email the policy outlook, which in any event is currently being swayed more by the inflation data than the growth data.
Never like to see the Zero Handle. So is the US Two Percent Economy headed into recession? Well, I am not going to head into the weekend on a down note, so I give you this from Deutsche Bank:
Published in EconomicsFalling markets induce recession forecasts quicker than you can scream sell. A Bloomberg survey puts the odds of a US slump this year at one-in-five, double three months ago. Really? In the 12 months leading up to each of the past five American recessions, annual auto sales growth was negative in at least eight months. No single such month so far. And cheap oil keeps those wheels turning. Growth in miles driven, which typically collapses before a recession, is near a decade-high. It’s not just cars Americans are getting around in – planes were also 85 per cent full in December. Finally, for market watchers worried about a flattening yield curve, the ten year-two year spread fell to a post-2008 low of 1.15 per cent this week. The last two times that happened a recession was at least three years away.
So…when we here at Ricochet are told that the economy is improving and we comment that we don’t see it, we’re the idiots.
Well, if one is on the fence about whether a recession is coming, the Fed is on course to remove all doubt.
I don’t see any real upturn in the economy until actual employment and labor force participation start moving upward. Announcements that there’s another reduction in the unemployment rate have no impact, because real people don’t believe it. They are not seeing jobs getting easier to find, nor does there seem to be any upward pressure on wages. That won’t change as long as we are stuck with this stifling regulatory environment – Obamacare, EPA over-reach, you name it.
So until someone … anyone … pulls the regulation cork out of the jobs pipeline, we’re stuck where we are.
I put absolutely zero faith in any economic forecast farther than one quarter out, as the data collected over a very long time shows that longer forecasts by economists and other professionals are not much better than chance. Even the CBO’s forecasts are no better than a simple regression line once you go out past a year or even a couple of quarters. It’s all just noise.
The fact that many still take long-term projections of this sort seriously is a sign of a dysfunctional profession, in my opinion. People would rather believe a forecast with no predictive track record than admit that the future is unknowable. The harm comes when our politicians use these rosy fantasies to formulate and carry out policy.
But there are disturbing signs right now that the economy is slowing down much more than the sunny forecasts suggest. One is that despite extremely low prices, there is currently a huge glut of oil, with filled tanker ships floating in harbors with no customers to sell to. Another is that China’s recession may be much worse than they are letting on. Never trust the numbers put out by a communist government when those numbers make their economy look better than you suspect.
Then there’s the systemic risk factor, which is through the roof this year. This is the last year of the most feckless administration in my memory, and the clock is running out for the opportunists and bad actors who may want to take advantage of that.
Economic indicators like household debt are back to the kinds of numbers we saw just before the 2008 meltdown. Since the 2008 crisis, the world has taken on an additional $57 trillion in debt in an attempt to forestall the inevitable. China has quadrupled its debt in the last seven years. That cannot continue.
Couple that with an increasingly partisan and frightened population going into the craziest election year in my memory, and all kinds of bad stuff could happen.
Finally, the government has pushed us into a corner we may not be able to get out of if another fiscal crisis or other calamity hits us. With interest rates at zero and debt through the roof around the world, we will be going into another recession with no bullets left in the gun and an economy riddled with malinvestments and distortions from years of governments inflating distortionary bubbles in an effort to keep the party going artificially.
If I knew where to put my money safely, I’d be doing it. But I have no idea where that is any more. So I guess it’s just time to tighten up the seatbelt and hope to survive the ride.
I wonder about retail sales. I can see that live Christmas sales at bricks-and-mortar stores would be flat, but the streets were humming with trucks delivering stuff bought on-line. I don’t think we know much about retail sales until we see reports from Amazon and its competitors. Have we seen such reports?
Well, ours were up over last year but not by as much as our forecasters had predicted. Not sure that means much…neither gloomy nor rosy.
Growth is an average and we don’t can’t really know what’s going on or about to happen. Some businesses are growing, some staying the same and some declining, the net of that is growth or decline and much of it is unrelated to the rest of it. Let’s say we have a three sector economy with two firms in each sector that enjoyed 2% growth. How many ways can we get that number? Infinite because there are always percent changes and negative numbers as well as positive numbers. Averages lose the important information so we’d have to disaggregate all of it to know what is going on and in our giant, not to mention global economy that is impossible and would tell us nothing about the future. The future exists in thousands of entrepreneurs and investors minds and even that is not known to each of them because they can’t know what will happen to their new effort if they make it.
Did your forecasters predict based on what management wanted to hear, or based on a realistic assessment of your market position and products? It seems like every year, half of the companies out there make up their sales plans based on hope.
It’s just the business cycle. The US will almost certainly enter a recession this year – pmi’s are still crashing, and two conseq negative quarters of corporate profits have never *not* predicted a stock market crash. This is also the worst start to the year for the S&P in history. What isn’t routine as others have mentioned are the levels of debt, the currency war and the deflation in commodities. It’s easy to be a doom-monger, but I’m certainly not long any stocks at this point.