One of the problems with following business news these days is that it is highly politicized. Increasingly, people’s view of the state of the economy is tainted by the political shading of their lens.
For instance, Larry Kudlow, director of the National Economic Council, went on the Sunday talk show circuit proclaiming that he does not see a recession on the horizon. Mr. Kudlow is apparently a perennial optimist because he made similar comments in late 2007 just as the great recession began.
The official definition of a recession is two consecutive quarters of negative economic growth as measured by a country’s gross domestic product.
While we are not there yet, one fact is indisputable; our current economic recovery has lasted twice as long as the average economic cycle. Over the past century, the average time span between recessions is 5.9 years. We are well into our 11th year since the economy last hit bottom. By historical measures we are overdue for a recession.
The problem with most recessions is that we don’t realize that a recession has begun until we are already in it.
Many view unemployment as an indicator of how the economy will perform. However, unemployment is a lagging indicator. It tells us where we now, but says little about where we are going. Currently, U.S. unemployment is at historic lows, the stock market is near record highs and the economy is still growing. So, most Americans currently feel pretty good about the economy. Will the good times last?
Recent economic reports indicate manufacturing is less than last year, while our economy is being carried by consumer spending. Unfortunately, other parts of the global economy, such as Germany, are slowing down. Britain is dealing with Brexit. Our trade wars with China will adversely affect the global economy.
Recently, I took my car to the dealer for maintenance. The service manager told me that new car sales are slower than he has seen in years. While he attributed the slow sales to competition from online dealers, the Wall Street Journal recently reported that dealers nationwide have large numbers of 2018 and 2019 models in inventory as the 2020 models are arriving.
The automotive industry is a significant component of our economy. GM has already announced the closing of several plants because of the shift of demand from autos to SUVs. But an oversupply of vehicles on dealer lots suggests that fewer need to be produced to meet demand. If so, we may see further auto plant closures.
The Wall Street Journal also reported that housing starts dropped 4% in July. This is the third straight month of decreased housing starts. Analysts cite the rising cost of labor and materials as the principal cause.
The Conference Board Leading Economic Index fell in June. The decline was primarily driven by weaknesses in new orders for manufacturing, housing permits, and unemployment insurance claims.
A somewhat more controversial leading economic indicator is the price of copper. Because copper is used widely by many sectors of the economy, some economists believe that declining copper prices are a leading indicator of a slowing economy. For what it is worth, copper prices have declined over the past year.
In the past week, markets were spooked by an inverted yield curve, where long-term borrowing is cheaper than short-term borrowing. In the past, when yield curves inverted for a period of time, they were a recession harbinger.
We are not currently seeing a preponderance of leading economic indicators pointing to sustained economic growth. Furthermore, one of the hallmarks of a recession’s outset is that outstanding debt is at unsustainable levels. Over the past 10 years, debt has increased significantly — perhaps to levels that are untenable.
Consumer debt recently surpassed $14 trillion, exceeding 2008 consumer debt levels by nearly $1 trillion. Consumers have been incurring debt to spend. They may be tapped out soon, which means that we cannot rely on the consumer to sustain our economic growth.
Subprime auto loans comprise about 10% of consumer debt. Several business commentators have suggested that the subprime car loans do not provide a threat to the economy. I recall similar comments about subprime mortgages leading up to the great recession.
Corporate debt owed by non-financial companies exceeds $9 trillion. That debt has nearly doubled over the past decade. While the corporate tax cuts have enabled many corporations to pay down debt, debt levels remain high and many companies may experience difficulty repaying the debt if there is a downturn.
Another sign that a recession may be in the cards is when the financial press tries to reassure the public that everything is really OK and these recessionary signs don’t necessarily mean a recession is imminent.
While, technically, we may not be in a recession, economic storm clouds loom.
Jim de Bree is a semi-retired CPA residing in Valencia.