Quick and Dirty Economic Indicator Says: Not Even Close to Recession
– by New Deal democrat
There are some economic and financial indicators that aren’t classic leading or lagging indicators. Rather, they are “over-sensitive” in one direction or another. Two good examples are heavy truck sales and the unemployment rate: they are over-sensitive to the downside: they lead going in to recessions, but lag coming out.
The S&P 500 stock market index fits in this category as well. The classic aphorism is “the stock market has predicted 9 of the last 4 recessions.”
But the converse is not true. With the stellar exception of 1929, when stocks themselves were in a bubble, if the market makes a new high, it’s almost a sure bet that the economy is not in a recession.
Here is the (almost) 100 year graph of the S&P 500 showing that, broken down into three 30+ year increments:
Outside of 1929, the market has always peaked at least 2 months before a recession has begun (those occasions were 1990 and 2007), and usually well before that.
Which of course makes it noteworthy that the S&P 500 made a new all time high yesterday:
Not only does that make it a virtual certainty that we’re not in a recession now, contra some DOOOMers, but it is very unlikely for one to start in the next few months.
Another way to look at that is to update my “quick and dirty” economic indicator of the YoY% change in stocks and the inverted YoY% change in initial jobless claims. Here’s what that looked like in the five years before the pandemic, showing that stock prices were lower YoY several times with no recession occurring (showing how they are over-sensitive to the downside):
And here is what they look like up through yesterday:
Typically coincident with or near to the onset of a recession, the market is down YoY, and initial claims are higher by 10% or more. Needless to say, neither of those is even remotely the case at present.
There are some caution signals out there, as I have highlighted earlier this week (real retail sales, housing units under construction), but lots that is flashing green and nothing significant that is flashing red.
The Bonddad Blog
Housing sector enters yellow flag “recession watch” territory, Angry Bear by New Deal democrat
Here are the 5 indicators for starting recession.
1. An increase in the national unemployment rate. Check – Sahm rule
2. Significant reductions in industrial production/manufacturing leading to supply chain issues for both businesses and consumers Check -PMI below 50 and increased Inventories
3. A decrease in retail business sales, particularly non-essential goods and services – Check Adjusted for inflation there are less amounts and items sold
4. A decrease in international exports Check -(would have gone down if not for 1.8 billion surge in semiconductor sale due to upcoming export restrictions.)
5. Reduced wages across the board and shorter shifts for hourly employees Check – (hours worked times average hourly earnings is decreasing)
Be prepared for all possibilities. I call this Hopium, but I hope you are correct. Transport index always leads the other indexes as pointed out. I am looking at GDI and seeing the gap to GDP. I believe the difference to be excess government spending. LEI and PMI are below 50. Move to cash and bonds or buy some long-dated puts. NFA Better safe than sorry. Better to invest 2% of portfolio value in some puts than lose 25%. Happy Trading.