ELLIOTT D. POLLACK
FOR IMMEDIATE RELEASE
December 10th, 2018
The Monday Morning Quarterback
A quick analysis of important economic data released over the last week
The stock market had a horrible week. The talking heads mention increasing rates, the flattening of the treasury yield curve, worries about the proposed settlement of the tariff situation between the U.S. and China, and earnings disappointments just to mention some of the reasons given. We’ll go over the one that would normally be considered a warning sign.
But first, an anecdote. My first economics class in college used a text book written by a Nobel Prize winning economist named Paul Samuelson. One of his famous quotes was “the stock market has predicted 9 of the last 5 recessions”. While it was a tongue in cheek statement, the concept is historically correct. There have been 36 corrections (a decline of 10% or more) and 11 bear markets (a decline of 20% or more) since the end of World War II. Of the 36 corrections, 12 were followed by or were part of recession periods. Not a great track record. Thus, in and of itself, the declines in the stock market are disturbing but not clear evidence that a recession is imminent.
On the other hand, the spread between the 5-year treasury and the 2-year treasury did turn very slightly negative last week. If the 10-year less 2-year spread also turns negative, it is a signal that the recovery is late in the game. That’s no surprise. By the way, the fact that no economist I know of looks at the 5-year minus 2-year spread is interesting only because this negative spread must have been discovered by a journalist. The FED generally focuses on the 10-year less 2-year spread. Others focus on the 10-year less 3-month spread. Those are still in positive territory.
No matter though. As we’ve discussed ad nauseam, the current expansion is long in the tooth and there will ultimately be a recession. But, not now. And, the next one is likely to bear little resemblance to the last one. So, let’s assume that the entire yield curve does turn negative. What those articles don’t mention is that the average number of months between when the yield curve (10-year minus 2-year) does turn negative and when a recession historically has started. In the five recessions since 1980, the average lag time between the yield curve turning negative and the recession was about 20 months. The range was between 10 months and 33 months. For those of you with good memories and too much time on your hands, you will remember the recovery from the January 1980 recession was only 18 month when the July 1981 recession started. So it is no wonder that the spread gave only a 10 month warning. But, let’s use 20 months. That puts the beginning of the next recession late in 2020. That’s certainly possible. We will see. But, none of that changes the prospects for continued growth in 2019. And as we said last week, the sky is not falling.
This week’s data gives a positive glow to the economy although the employment numbers were below expectations. Jobs grew by 155,000. Unemployment remained low. Consumer sentiment remained high. Consumers remained conservative with their credit cards, although auto and student loan debt continue to grow at a rapid rate. And while new orders for manufactured goods were down for the month, the ISM manufacturing index remained strong. Not a bad picture for an elderly economy.
U.S. employment added 155,000 jobs in November. Expectations were for closer to 200,000 jobs. The unemployment rate was flat at 3.7%. The problem seems to be a shortage of workers as well as concerns about how soon trade issues with China will be resolved. Overall, monthly job increases this year have been very strong despite historically low unemployment rates. This has led to a worker shortage. This, in turn, is causing increases in wage growth that will lead the FED to continue its program of tightening. This pattern is likely to continue at least through 2019.
The University of Michigan Consumer sentiment index remained at 97.5 in December. This is the same as November and reflects continued optimism on the part of consumers.
Manufacturing orders for manufacturing goods fell 2.1% in October. But, it remains 6.9% above a year ago.
U.S. consumer credit increased 0.6% from September and 4.7% from a year ago. Nonrevolving credit grew by $16.2 billion and there was a $9.2 billion increase for revolving credit.
The ISM manufacturing index increased from 57.7 in October to 59.3 in November. Any number above 50 indicates growth in the sector.
The ISM index for non-manufacturing increased 0.4 to 60.7 in November from October. Anything above 50 indicates growth in the sector.
According to the Cromford Report, active listings increased 4.0% in November from October but remains 3.4% below last year. The number of resales decline 9.7% from October and 7.8% from a year ago.
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