Softer but No Recession – November 25, 2019

Leading economic indicators are suggesting economic growth will soften through the end of the year, but we’re not seeing signals that a recession is looming. Before I go on, let me say that the recessionary track record for economists isn’t great. Still, we can review important signs.

Let’s start with the Conference Board’s Leading Index, which consists of 10 monthly economic reports that are leading indicators of economic activity.

Including last week’s release of October’s data, the index has slipped for three-straight months. It’s not signaling an impending recession, but it suggests growth is poised to slow.

While job growth has unexpectedly turned higher, job openings have receded (the U.S. Bureau of Labor Statistics), and weekly claims for unemployment compensation are at a five-month high (U.S. Dept of Labor as of Nov 16).

Again, neither indicator portends a recession, but a downtick in job openings and an uptick in claims for unemployment insurance suggest growth may be downshifting as we move to 2020.

Reflecting the slowdown

The Atlanta Fed’s GDPNow model, which projects quarterly Gross Domestic Product (GDP) as new economic reports are released, puts Q4 growth at just 0.4% (as of Nov 19). However, caution is in order. It’s early in the quarter. The model has not crunched November’s and December’s reports, and some of October’s data have yet to be released.

A strong Christmas shopping season would aid over all activity. Still, the model is off to a slow start.

Factors supporting growth

With the bad news out of the way, let’s review the positives. For starters, housing activity has perked up thanks to lower mortgage rates (U.S. Census, National Association of Realtors).

Consumer confidence is off its prior peak but has held up reasonably well, which supports consumer spending.

As recession fears have diminished, let’s not forget about recent stock market highs, which is a sign of investor confidence. Mostly optimistic trade headlines have also supported shares. However, we’ve been down this road before. Failure to conclude a signed agreement between the U.S. and China would likely create renewed volatility.

If we turn our attention to credit markets, there are few signs of an impending downturn. High yield debt (junk bonds) is an early warning indicator, and we haven’t seen much of an exodus out of these economically sensitive bonds.

Further, financial stresses are low, which is a sign that credit continues to flow to businesses and consumers. According to an October survey conducted by the National Federation of Independent Businesses, only 3% of small business owners reported that all their borrowing needs weren’t being met.

Finally, a broad-based measure of the money supply has accelerated sharply in recent months, per St. Louis Federal Reserve data. Money supply growth doesn’t always translate directly into economic growth, but it may be setting the stage for an economic rebound in the second half of 2020. Stay tuned.

Created 2019-11-25 15:42:11