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Serving: United States
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Is a recession looming?

Experts read the tea leaves as they attempt to find early warning signs

It’s good news – the U.S. is in the middle of the longest economic expansion in the country’s history, stretching all the way back to January 2009.

All good things someday come to an end, however, and some recent economic signals suggest a recession could be on the horizon. But those signals are not necessarily cut and dry, leaving plenty of room for speculation about the size, shape and timing of the next recession.

David Kohl, professor emeritus at Virginia Tech and Farm Futures contributor, worries that because the current economic expansion has been long but relatively shallow, the next recession would take a similar trajectory, for example.

“What if the next recession isn’t deep but it is long?” he asks.

But more importantly, Kohl has been asking another question: How will we know if a recession is eminent?

Different economists focus on different factors, and Kohl is no different in this regard. He looks at the following five indicators in particular.

1. LEI / Diffusion Index. This is a way to look at “the common tendency within a group of numbers or statistics,” according to Investopedia. When the economy is growing, the LEI (leading economic indicators) / Diffusion index also moves higher. In a recession, this index typically has declined 0.3% for three consecutive months.

The LEI / Diffusion Index has slid lower in the past three months, but not to the benchmark 0.3% per month. It was down 0.2% in August and September and slipped another 0.1% in October.

“The decline was driven by weaknesses in new orders for manufacturing, average weekly hours, and unemployment insurance claims,” according to Ataman Ozyildirim, Senior Director of Economic Research at The Conference Board.

2. Consumer Sentiment. This index from University of Michigan tracks exactly what it’s named for. Any score above 90 is considered positive, and anything below 80 is worrisome. November’s index of 96.8 was a modest improvement over October’s reading of 95.5.

In fact, consumer optimism is second only to “the period from January 1998 to December 2000,” according to Richard Curtin, Surveys of Consumers chief economist.

3. Housing Starts. This is another way to say new home construction. Anything below 1.0 million per month is worrisome, Kohl says. Fortunately, this threshold hasn’t been crossed since March 2015. The most recently available data, for October 2019, shows 1.314 million housing starts last month.

4. PMI. The Purchasing Managers’ Index (PMI) is another type of diffusion index that collects various manufacturing data. Any reading over 50 signals a manufacturing expansion, with any reading below 50 signaling a retraction. Kohl says anything below 41.7 is worrisome.

While the PMI is currently above that threshold, it is coming off a decade-low of 47.8 in September to 48.3.

“Global trade remains the most significant cross-industry issue,” according to Timothy Fiore, Chair of the Institute for Supply Management Manufacturing Business Survey Committee. “Overall, sentiment … remains cautious regarding near-term growth.”

5. Stock Market. This metric is arguably the strongest of these five factors. As of November 25, the Dow has gained more than 20% in 2019 – double the amount needed to be considered in “growth mode.”

Granted, these five factors are not the only indicators of a looming recession, not by a long shot. Take, for instance, the inversion of the 10-year/2-year treasury bonds (when short-term interest rates move higher than long-term rates). That incident has successfully predicted the last five recessions – and it happened again earlier this summer.

“It’s among the first signs an economy is shrinking,” according to Markets Insider fellow Ben Winck.

Some look to more obscure factors, such as the price of copper (jokingly called “Dr. Copper” by some analysts), which is seen as a barometer of economic health because it is used in so many key sectors such as homebuilding and manufacturing. Copper futures are improved over a multiyear low in September but still relatively suppressed.

Because there are so many moving parts that often work in tandem to trigger a recession, such an event is actually much easier to recognize in hindsight, says Bluford Putnam, Managing Director and Chief Economist of CME Group.

“By the time I tell you we’re in a recession, we’ll have been in it six to nine months,” he says.

Recessions usually come with a “debt story,” Putnam adds.

“Some sector gets in trouble and creates a vicious cycle if the sector is big enough,” he says.

Perhaps its time to be more wary of the recent glut of personal loans, then. The number of personal loans has spiked 10% from last year, with an average balance of more than $16,000. That’s a lot of unsecured debt that could come crashing down if the stars align. Indeed – there was a similar uptick in personal loans immediately preceding the Great Recession.

To gain more valuable insights about U.S. economic trends and how it might affect the agriculture industry, don’t miss the Farm Futures 2020 Business Summit January 23-24 in Coralville, Iowa.

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