Six Reasons Why We’re Not Headed For Another Recession
It’s easy to understand why everyone is so concerned about the economy.
After all, the latest survey from the National Association of Business Economists (NABE) reveals that only 11% of business economists expect growth of more than 3% this year. That’s down from 37% in the previous survey.
In addition, the latest U.S. job report showed that non-farm payrolls rose by only 18,000 in June, compared to expectations of 125,000.
Yikes! Next stop: Recessionville, right?
Remember… economists are like weathermen: They get paid even when they’re wrong. And they’re wrong a lot. Plus, employment is a lagging economic indicator anyway.
We should use more reliable predictive tools to discern the future direction of the economy.
You Can Put the Pepto-Bismol Away… Recession isn’t Imminent
~ Recession Buster #1: The Stock Market
As it turns out, the U.S. stock market is actually one of the best performers this year.
The S&P 500 is up almost 6% year-to-date. By comparison, the “must-own” emerging markets of Brazil, India and China are all down for the year.
Now if that doesn’t at least squelch some worries that we’re headed for another recession, here are five other signs that should do the trick.
~ Recession Buster #2: Retail Sales
Last week, the Commerce Department said retail sales edged up 0.1% in June, which confounded the analysts who expected a 0.1% decline.
Now I’ll concede that the short-term numbers are hardly anything to get excited about. But they do contribute to a clear trend. Over the last year, retail sales are up 8.1%. That’s the third highest year-over-year increase through June since 1994.
It’s also worth noting that the three retail industries with the sharpest increases in June – Building Materials, Autos & Parts Dealers, and Clothing – are all cyclical in nature. If we’re headed for another recession, sales for these categories should be headed in the opposite direction.
~ Recession Buster #3: Baltic Dry Index
The Baltic Dry Index tracks the cost of shipping major raw materials. Goods like iron ore, coal, grain, cement, copper, sand and fertilizer.
In other words, the index tracks shipments of goods that are essential to economic output. As such, it provides a precise and rare measurement of the volume of global trade at the earliest possible stage.
Since bottoming out in early February, the Baltic Dry Index is up about 30%. Again, if we were headed for a recession, the index should be plummeting, not increasing.
~ Recession Buster #4: Yield Curve
One of the best predictors of recessions is the yield curve – the difference between short-term and long-term interest rates on government bonds.
Remember, a steep yield curve points to economic growth. A flat yield curve signals uncertainty. And an inverted yield curve hints at an economic slowdown or recession.
Yet with 90-day Treasury bills yielding 0.1% and 10-year Treasury bonds yielding 3.13%, there’s only one way to interpret the current yield curve in the United States – it’s steep!
~ Recession Buster #5: Financials on the Mend
Financial companies got us into this mess, so they should be the ones to get us out of it, too. And that’s clearly happening.
Take Citigroup (NYSE: C), for instance. Last week, the company reported its sixth straight quarter of profits. And it did so on the back of declining loan losses. In fact, losses from bad loans fell 35% during the quarter, allowing the company to release $2 billion from loan loss reserves.
If we were headed for another recession, losses on bank loans would be mounting, not declining.
~ Recession Buster #6: Hiring
Although unemployment remains uncomfortably high at 9.2%, the latest hiring trends are encouraging.
In April, McDonald’s announced that it was hiring 50,000 new employees. But the firm actually ended up hiring 62,000.
It’s not alone. In recent weeks, JP Morgan Chase & Co. (NYSE: JPM), Best Buy Co. (NYSE: BBY), International Business Machines Corp. (NYSE: IBM) and Target Corp. (NYSE: TGT) have announced plans to hire a combined 44,000 new employees.
We’ll need about 150,000 new jobs per month for four years to get back to pre-recession levels. But at least it’s a step in the right direction from some of America’s biggest companies.
Bottom line: Although U.S. economic growth might be slowing, another recession isn’t right around the corner.
Ahead of the tape,