No Sign of Recession in the Data

If you are a market-watcher, you know the S&P 500 is down around 9% since the beginning of the year and has been down as much as 10.5%. As investors watch their accounts, the fear is always TWICE as significant as any euphoria over gain. This is the investor’s dilemma. How to fight the urge to cash in your chips and run for the hills.

But this situation, based on the numbers, is classified as a garden variety correction. But some, if you read the pessimistic pundits, analysts, and pseudo “investors” (frequently called speculators or gamblers), are treating this correction as the precursor of the recession they’ve been consistently predicting for 6 years. You have to wonder what else they think about, if anything.

1Their argument is if we’re falling into a recession, then the decline in stocks isn’t really a correction but the end of the bull market that began in March 2009 and the start of a new bear market, with at least another 10% decline to go.

There is only one problem. The data on the economy is simply not cooperating with their recession theory.

For instance, new unemployment claims fell to 269,000 last week and remains very low by historical standards. Historically, new jobless claims SPIKE higher right before or in the early stages of a recession. This has not happened yet, but according the pundits, that does not mean we are not in a precession fall.

The data shows jobs are growing and workers are generating more and more purchasing power. Exclude fringe benefits and irregular bonuses/commissions, workers are earning 4.7% more than they did a year ago. Meanwhile, the consumer debt service ratio (the share of their after-tax income needed to make monthly debt payments on mortgages and other consumer debt) is hovering near the lowest levels since the early 1980s.

Theoretically, it is possible consumers have a low debt service ratio because the highest earners are earning more driving down the ratio overall and hiding growing financial stress, but the data doesn’t show this. Borrowers are “current” (or not delinquent at all) and this ratio increased for the sixth year in a row in 2015. This does not include student loans. After peaking in 2009 at 2 million, the number of consumers with new foreclosures fell to 400,000 in 2015. This is the lowest on record going back to 2001.

Cars and light trucks continue to fly off of dealer lots, reflecting growing earnings and consumer savings from lower gas prices. The median credit score on auto loans is down from 2009, but it’s equal to where it was in 2003 and higher than every other year between 2000 and 2008.

Energy companies continue to get hammered because of the oil prices. But companies outside that sector, overall, have been doing fine, with earnings up slightly from a year ago.

Recession history shows an upward spike in inflation generally precedes the Federal Reserve tightening monetary policy. Inflation will gradually move higher in the next couple of years, but, as of yet, there’s simply no sign of a recession-causing spike in inflation. Those who argue the Fed was causing hyperinflation with low interest rates have proven to be wrong.

Recessions usually have a major downturn in housing. Home builders started 1.1 million homes last year, including both single-family homes and apartment units. That’s roughly double the bottom in 2009, but still well off the roughly 1.5 million homes we need to start each year just to keep up with population growth and losses due to voluntary knock-downs, fires, floods, hurricanes, tornadoes and earthquakes.

2All to say, the kinds of events and economic numbers that are indicators of a coming recession are just not there. However, the current Plow Horse expansion is almost seven years old. But, as a recent Fed Paper makes clear, modern economic expansions don’t end just because they’re old. As an expansion ages, the odds of a recession starting soon barely budge.

Is a future recession is inevitable? Yes, markets go up and markets go down. Current economic conditions suggest the US Economy is not on the precipice and is unlikely to get there any time in at least the next couple of years. However, this will NOT keep the pundits from spewing their disaster scenarios. Because one day, unfortunately they will be correct, only, they forget they won’t last real long before the market starts another uptick and bull market rally. Remember, markets go up and markets go down. It is the law of capitalism and economics.

Posted In : USA, Market Commentary