Projecting a Recession from 2013
I woke up today to see oil below $27 a barrel, the US 10-year at 1.6% and the Dow down to 15,600. How quickly the economy is faltering. It is a crazy moment.
Oil below $29 a barrel creates Geo-political tensions that can create attacks of aggression. Other countries have already tried to negotiate with the Saudis to raise oil prices… and now oil is slipping to even new lows. A tense situation for oil producers.
The US 10-year hitting 1.6% so fast over the past month seems to be building downward momentum. The yield curve is trying hard to flatten even with short-term rates near zero.
Recession seems imminent. Will it happen?
I called a recession this year based on my assessment of effective demand. Others like Tim Duy and Janet Yellen do not see a recession this year. But they lack an understanding of effective demand.
I have seen this coming for a couple of years.
Back in September of 2013, using my Aggregate Supply- Effective Demand model, I saw that an effective demand limit was forming at a Real GDP around $16 trillion (2009 $$). The AS-ED model was only developed in April, 2013.
Here is an image from a post back then.
I saw that the effective demand lines were bunching together setting up a Long-run Aggregate Supply zone around $16.1 trillion, where the aggregate supply and effective demand lines would meet.
I wrote in September, 2013…
Eventually in a post in August of 2014, I projected…
“The projection now is for real GDP to enter the zone of the effective demand limit between $16.000 trillion and $16.160 trillion. This will happen before 2014 ends assuming the calibration of 0.762 for effective labor share is within a close margin of error.”
So what happened?
Update Note: The red dots in this graph show the crossing points between aggregate supply and effective demand. These red dots are different from the red dots in the previous graph. These red dots show the equilibrium so to speak between aggregate supply and effective demand. In both graphs, the crossing points expanded upward as Real GDP hit the effective demand zone (LRAS).
The equilibrium points began to rise when Real GDP hit $16.1 trillion. That is a sign of hitting the effective demand limit. This happened before the end of 2014, just as I had predicted. When effective demand rises in the LRAS zone, the dynamics of the economy are on the downside of the business cycle, just starting downward.
Ever since the end of 2014, the economy has been faltering. I predicted that the Dow would orbit 17,300 through 2015. And it did. I gave a 70% chance of recession this year back in January. (link, see comments.)
If this cycle is like the cycle before the 1980 recession, we would see a recession about 2 years after hitting the effective demand limit… That would put a recession this year, 2016, in the summer or fall.
So I got glimpses of the effective demand limit upon Real GDP as early as September, 2013. We have seen this coming for years.
I’m confused by the y-axis on the last graph , showing cpi at such high levels compared to what the official data has shown over the last few years. Of course , like many , I have my doubts about the official data.
What do you you think about the possibility that the economy simply grinds to a halt at near-zero growth and stays there , as opposed to having a more typical recession / recovery cycle ?
The red dots in the last graph show where the lines cross, not the inflation rate where Real GDP is. The red dots measure the equilibrium so to speak between Real GDP and effective demand. The red dots in the second graph are real GDP points. So there is a difference there. i should make a note in the post.
Grinding to a halt? There is a lot of inefficiency in the economy that has to be cleaned up. We need a cleansing. Which means a downturn. I hope we do not get just a halt. The economy will stay sick in the next business cycle too.
None of that “predicts” a recession. The DOW is irrelevant useless. Outside 83-2007, It has very little historical value. Its run up in 2013-15. The 10 year is irrelevant.
Absent a major bounceback in equities, YOY change in real HH net worth as of March 30 will be negative. That will be reported in the Fed Z.1 release in the second week of June.
Every time that number has printed negative, since the 70s, we were either in or within months of being in a recession.
So that supports your timing prediction.
The problem is, this “runup” has no historical connotation to modern times. Stocks never ran up on commodities. Todays “selloff” is useless. No volume and will be reversed.
Lets also remember, commodities raise the cost of credit and slow economies during high price phases.
I think there are some expiration games going on with WTI. Brent isn’t following and the gap is huge. If you strip out most of the commodity(really oil exploration) speculation, base market prices are at about 16000/1800. There is some nasty resistance below that. The farther you make it fall, the further it has to come back up imo. They call it “buying the dips”.
Jobless claims also declined. Not a real sign of recession.
Looks to me that since the critical boundary was crossed in late 2014 we should have had a recession last year. But we did not, so you are wrong. I have never thought much of your theory of effective demand, and you have just provided strong evidence of how wrong it is. Thank you..
Weren’t you expecting the market to go up last month? And I said the values were too high.
The model does not say that there should have been a recession last year. The midel is signaling dynamics that lead to what we are seeing now. Even Yellen concedes a downturn is possible.
Ed, you are trying to hard. Stop overrating the market. Sure it will go up, when they find something else(why does this tell me another Reit spec is coming?) to speculate on?
Yellen is irrelevant. She says a downturn is possible. It was in 1986 as well. There is always downturn possibilities. The credit market isn’t signaling that however. It is telling us the opposite. Markets are poorly constructed vehicles for absolute truths. They blunder in short term windows quite a bit. They are looking for a crisis that doesn’t exist and right when RE production is about ready to take another step up(got a huge backload in my business with future production dealing with that industry).
Yves Smith posted this video of Bill White ( formerly @ BIS ) who has his doubts about the efficacy of negative rates ( NIRP ) :
At the end he suggests , wisely IMO , that fiscal stimulus , e.g. infrastructure , and wage gains for workers would be a better way forward.
In the U.S. , we should combine that with a change in the income tax structure designed so as to re-shift a big chunk of the 10% of income share that was redistributed upward from the bottom 90% to the top 1% over the last few decades. Do it gradually , though. Boil the frogs slowly , once again , but this time , go after the Gucci-wearing frogs. Bernie would make an excellent chef for this feast.
Hitler thought NIRP sucked too , BTW :
Negative interest rates reveal a race to the bottom type of dynamic going on. Zombies are going to feed heartily.
The global economy needs discipline and some bitter medicine.
Of course the economy was going to react downward to a Fed rate rise, but that is only part of the cure. Eventually the economy gets healthier. People do not see that.
fwiw, a business associate also told me the market(global market) doesn’t like negative rates. That is fueling the current selloff. He thinks it will peter out in the end, because once all the capital is in America, there will be nothing left to flee.
A recession is a process. Like I say in the post, a recession can occur 2 years after hitting the ED limit. Or maybe more… but we see the process happening. Effective demand is expanding on the other side of the limit. Real GDP can keep rising in that period.
Your are looking for data in real time to locate a recession. My model looks at a broad macroeconomic relationship to forecast environments for recession years in advance.
The hope of economics is to find such a model.
Noah Smith is at his best mealy-mouthed, ass-kissing-while-ass-covering self today :
“Did the Great Recession inflict permanent damage on the U.S. economy? Or was it just a deep hole that took a long time to climb out of? Evidence now says that it was MOSTLY the latter.”
“Based on how fast the U.S. recovered from the 2008 financial crisis and the recession that followed, the speed hasn’t been TOO DIFFERENT from that of other recessions during the past 30 years. ”
“The steady recovery has MOSTLY confounded the predictions of the so-called structuralists, who believed that the Great Recession caused the nation to transition to a permanently weaker economic footing. ”
And then , the suck-up , the bend-over :
“This recovery is a victory for mainstream macroeconomics. It validates the idea that economies restore themselves naturally after recessions — especially with help from monetary and fiscal policy. ”
Bullshit , Noah. We’ve lost trillions in output that we won’t recover. We’re now on a lower growth path for per capita gdp compared to that of the last several decades. We’ve got the same economy-wide nonfinancial leverage we had when the recession started , along with a bloated Fed balance sheet to boot. And now , as the mainstream is taking their undeserved bows , it’s all slowing to a crawl .
By all rights mainstream econ – and its pimps – should slink away in shame , but instead , like Trump , they just continue to glorify in their own dim-bulb illusions of competency , as if everyone around them hadn’t already noticed what utter buffoons they are.
Hey now that we in negative interest rate territory can I get a refi on my mortgage that pays dividends instead of charging me interest? Just saying.
Seems to me this process has correctly predicted 9 out of the last 5 recessions. (apologies to Paul Samuelson).
You are missing the point. When you follow model above, it pointed to a moment when the dynamics of the economy would change. And they did. Now we watch the dynamics unravel into a business cycle.
While Rome is burning all are prognosticating. What is really happening is that greed is taking over the world while you all are fiddling with economic predictatory modeling. The real enemy of America today is not so much ISIS as it is greed. The oligarchs have created ISIS as a distraction to conquer and divide. Sanders is on board with this but most Americans are to busy trying to keep their heads above water to really see what is happening. PCR talks a lot about the ramifications of the oligarchs power and corruption that now is very present through out or government at all levels. Wholesale greed by the top 1% and many of their mail carriers purposely divided below them is what is really destroying our great American values, culture, economy and political system. Yes we have reached the effective demand limit long ago but the model does not include the unchecked greed factor that is destroying our democracy, values, economy and who we really are and want to be as Americans. This is why we need revolutionary change this time.
“but the model does not include the unchecked greed factor ”
Actually, it does. Edward’s effective demand is a function of labor share, which is impacted (IMHO) by the success capital has had at being greedy.