Don’t you wish you had advanced warning that The Great Recession was coming? Although there are no guarantees in the business of predicting the future, there is no reason we should not pay closer attention to reliable and proven economic data that is readily available. For example, over the last three recessions, the number of individuals employed by the residential building industry experienced a sharp downturn 12-25 months prior to the recession hitting (see chart below).
Auto and light truck sales are another good measure of U.S. economic health. As illustrated in the chart below, a consistent downward trend in U.S. auto and light truck sales typically forewarn of a recession by 13-35 months. Clearly, the current upward trend in the automotive and residential construction industries show no current signs of slowing. Some experts predict we have reached the peak in automotive sales for this business cycle, but the numbers do not demonstrate this yet.
Unemployment is another topic we are hearing a lot about in the news recently. Speculation centers on whether the U.S. economy has yet achieved “full-employment.” As you can see from the chart below, U.S. unemployment tends to bottom out and then fluctuate a little prior to the next recession. In retrospect the pattern is easy to spot, but without the benefit of hindsight, there is always speculation about whether our current rate of unemployment is at the bottom, or just hesitating before going lower. This is where it’s important to listen to the experts, and hear their reasons and rationale.
The big talk these days, however, is interest rates. Back in the summer of 1954 our country saw low interest rates of less than 1%, but we have never experienced zero and near-zero interest rates as we have for the past eight years. As the chart below illustrates, the U.S. Federal Reserve typically lowers interest rates once a recession begins. This action is intended to encourage consumer spending and spur industrial investment. This makes sense initially, but after a period of time all those who have been encouraged to buy a house or upgrade their plants have already done so. And where does the Fed go from here? It’s been 7 ½ years since our country’s last recession. The next is presumably on the way. Can interest rates go lower than 0%? The answer is “yes,” which is called negative interest rates. The European Union has done this, as well as Japan, and neither has had any success. Another option is for the Fed to implement an unconventional monetary policy called quantitative easing (QE), where it purchases long-term bonds in order to increase the money supply. QE increases the money supply by flooding financial institutions with capital in an effort to promote increased lending. Since the last recession, the Fed has done this three times: QE1, QE2, and QE3 (see circled numbers below), having increased the money supply by $3.6 trillion. Unfortunately, if the money supply is increased too quickly, it can cause inflation, which is another metric we are carefully watching.
So how is 2017 looking? Other than interest rates being far too low and the Fed trying to figure out how to increase them, the rest of the economy’s market fundamentals are very strong; possibly at their peak. Is there a recession around the corner? Probably, but most likely not for another 12-24 months.
Please visit NTH’s new OUR ECONOMY web page and review several other economic metrics, insightful notes, and article links to help you learn more about our national, state, and local economies. Please let us know what you think, and feel free to send relevant articles to NTH’s Marketing Department so we may share them with other members of our community.