The question is being asked regularly and often, are we starting a recession? Time will tell, but there is evidence we are and evidence we are not. Those who have yet to call a recession are called perma-bulls, wrongly I think. The 2008 Panic was not a recession because it was artificial and caused by bad regulatory policy. The policy led to dysfunction in the markets by those who took advantage of the regulatory lapses. Another reason is that for 7.5 years, the economy has not exploded or imploded. It has just bumped along due to low interest rates and low oil prices.
This economy has been referred to numerous times as a Plow Horse economy. It has been growing steadily but slowly. Remember fears about adjustable-rate mortgage re-sets, or the looming wave of foreclosures that would lead to a double-dip recession? Remember the threat of widespread defaults on municipal debt? Remember the hyperinflation that was supposed to come when Quantitative Easing abated? Or how about the Fiscal Cliff, the Sequester, or the federal government shutdown? We also had the recession talk from higher oil prices…and then from lower oil prices. How about the recession from the looming breakup of the Euro or Brexit?
In the end, none of these brought recession or were reasons to bail out of stocks. Does this mean those who were “steady as you go” were “perma-bulls?” Does it mean that just because you don’t yell “The sky is falling” that there will never be concerns about the prospects for a looming recession?
Recessions are cyclical. Markets go up and markets go down. So sooner or later, the US will have another recession. And even though the “perma-bulls” have pushed back against recession theories these past several years, recession theories that make sense are always being considered. Looking at the current data, a recession is still not likely to happen anytime soon. BUT, there are some data that is concerning.
For more than fifty years, medium and heavy truck sales have been an indicator of an impending recession. Anytime sales have dropped substantially, a recession has begun within 2 years based on the data. There has been a 31% drop since June 2015. If that metric holds this time around, a recession could be starting by the middle of 2017. The US is heavily dependent on trucking, so a drop in sales has to be taken seriously. This drop since mid-2015 would normally be a strong signal a recession is in the offering. However, this decline has been precipitated by falling oil prices and less mining activity. Other declines have not had such an apparent cause and effect.
Another factor is new regulations that were instituted prior to mid-2015. Sales increased dramatically due to the implementation of new regulations on truck antilock braking systems. The announced regulations likely accelerated some sales to avoid the new rule. There are other regulations related to emissions that affected sales as well.
“Core” industrial production, which excludes utilities, mining, and autos, is down 0.9% from a year ago. Historically, a decline of nearly 1% is a precursor to a recession or happens right after they end. But this decline also happened back in January 2014. It is always best to wait and see. The lower oil prices and the huge drop in drilling activity in the energy sector could be holding down production. However, should truck sales and core industrial production continue to show weakness, this would certainly indicate a recession is starting.
For now, the weight of the data shows continued Plow Horse growth. Job growth continues on the uptrend. Initial unemployment claims have averaged 261,000 over the past four weeks and have been below 300,000 for 80 straight weeks. Consumer debt payments are taking a low share of income, while consumer delinquencies are still dropping. Wages are accelerating. Home building has continued to increase the past few years, despite the decline in home homeownership. This portends plenty of growth ahead.
Meanwhile, government policy has been relatively stable the past two years. Many would say policy could be much better, but at least the pace of bad policies has waned somewhat. In summary, there does not seem to be any reason to think the Plow Horse economic growth is fading. Remember, markets go up and markets go down. Even if there is a recession, protecting your capital through a diversified and balanced portfolio is the best way to proceed. What goes down, goes up. When an investor tries to miss the downs, it becomes a lot easier to miss the ups. Rebalancing and tracking the Efficient Frontier remains the best way to protect against the ups downs of a capitalistic economy.
The foregoing content reflects the opinions of BTA Advisory Group and is subject to change at any time without notice. Content provided herein is for informational purposes only and should not be used or construed as investment advice or a recommendation regarding the purchase or sale of any security. There is no guarantee that these statements, opinions or forecasts provided herein will prove to be correct.
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