Whether it’s inverting yield curves, or the strong US consumer, conflicting economic data both hard and soft, has been causing fits for economists, central bankers and investors. Add in macro uncertainty primarily related to trade wars of all types (US/China, S.Korea/Japan, UK/Europe) and central bank activism and you have a potential wicked stew of contradictory signals.
Simplistically, everyone wants to know when will the next recession begin? On the negative side, last week, we discussed the latest US yield curve inversion. According to Bloomberg, the NY Fed’s Probability of Recession in US Twelve Months Ahead recently exceeded 30% — a level that has presaged every recession since the 1960s (see the chart below).
However, according to CNBC, Credit Suisse says everything is “A OK”, for now. They recently looked at what they believe to be the seven most credible indicators of a recession. In past recessions, indicators like inflation trends, job creation, credit performance, ISM manufacturing, earnings quality and the housing market were all recessionary or neutral, while the current state of the economy is telling a much different story.
Interestingly, this is Credit Suisse’s visual interpretation of complex data sets in order to provide a simplistic dashboard, which understandably involves qualitative opinion. We might argue that manufacturing data is worse than neutral, for instance. But even they admit that “recessionary indicators are more mixed than they have been since the financial crisis.”
In our opinion, the US consumer will be the tiebreaker. If consumer confidence remains high and consumer spending stays strong, we think it likely that we skirt a recession for now.
We are legitimately concerned that the 2020 Election in the US and the campaigning that leads up to it will make consumers feel worse, not better. No judgment here, but think of the rhetoric already being dispatched by the presidential challengers about the “real” and disappointing economy (as we said earlier, data is available to support almost any view). It’s unlikely to inspire confidence and accelerate consumer spending as things get even messier from here.
The views presented herein are those of Validus Growth Investors, LLC (“Validus”) as of August 2019 and are provided for informational purposes only. There is no guarantee that any historical trend illustrated above will be repeated in the future, and there is no way to predict precisely when such a trend might begin. The information is based on the economic and market conditions as of this date. The information is not intended as a discussion of the merits of a particular offering and should not assume that any discussion or information provided herein serves as the receipt of, or as a substitute for personalized investment advice from Validus or any other investment professional. Past recession indicators do not necessarily indicate future indicators.
This material is provided for informational purposes only and does not constitute a solicitation. The material is not intended to be relied upon as a forecast, research or investment advice and is not a recommendation, offer or solicitation to buy or sell any securities or to adopt any investment strategy. There is no guarantee that any forecasts made will come to pass.