- by New Deal democrat
At the beginning of the year, I identified 5 trends that bore particular watching, primarily as potentially setting the stage for a recession next year. Now that we have the first 3 months of data, let's take a look at each of them.
#5 Gas Prices
One potential pressure point on the economy is gas prices, which appear to have made a long- bottom in January of 2016. As they began to rise, consumer inflation has increased from non-existent to almost 3%.So the issue is, will they rise even further and drive inflation even higher?
So far this year, that has not been the case. Typically it has taken a 40% YoY increase in gas prices to shock the consumer. While gas price increases did briefly approach that point, they have backed off considerably:
#4 The US$
Another potential pressure point on the economy is a big increase in the relative value of the US$, which was part of the shallow industrial recession of 2015. The $ started to rise again after the November election. Here the story is more mixed:
Against all currencies, the US$ has not risen too much, while against major currencies, it has risen just enough to have some negative effect.
#3 Residential construction spending vs. mortgage rates
Another data point which rose sharply after the November election was interest rates. Generally speaking, home building changes in the opposite direction of interest rates. So would the increase in interest rates (e.g., mortgages) cause new residential construction to back off?
The resilience of the housing data has been the most positive surprise of the year.
#2 The Fed Funds rate vs. consumer inflation
If consumer inflation rose past the magic 2% Fed target, would the Fed chase it? The Fed's preferrred measure is personal consumption expenditures, but consumer inflation YoY as of March was up +2.8%. The Fed did duly hike interest rates:
The expectation seems to be that unless there is some surprising slowing, several more interest rate hikes are in store. So far the yield curve (left graph below) isn't misbehaving (light red is last August, dark red is now):
But it will be difficult to avoid a compression if not an inversion in interest rates should the Fed stay on its current course with several more hikes.
#1 Real retail sales vs. real average hourly earnings
The final graph comes from my "alternate" recession forecasting model which turns on consumers running out of options to to continue increasing purchases (i.e., no interest rate financing, no wage real wage increases, and no increasing assets to cash in). The long term relationship has been that sales lead jobs, and jobs lead nominal wage increases, but real sales vs. wages are somewhat more nuanced. In the inflationary era, through the early 1990s, YoY wareal wage growth actually slightly led sales. In the deflationary era that dates from the alter 1990s, if anything the two are a mirror image, but in every case but 2001 (where real wage growth just decelerated rather than declined), both have been negative going into recessions:
Focusing on the last 20 years makging the deflationaary era, at present with inflation up, real wages are actually down YoY at this point:
I would expect to see both sales and wages stall out before the onset of the next recession. So far, sales are holding up.
Bottom line: with the exception of the US$ against major currencies, and the consumer inflation rate, for now the signals from the data series I have highlighted are all still green.