- by New Deal democrat
Earlier this week I promised an updated Big Picture forecast and nowcast for the US economy, plus a note about how broad or narrow was the participation.
Most commentators either have a financial or ideological agenda - getting you to buy their stock recommendations, or selling you on DOOOM, cherry picking the data du jour that buttresses their opinion - or else they simply project current trends forward, and thus miss turning points. By contrast, for over 20 years I have doggedly followed a variety of the same (growing list of) economic indicators, following their historical records as to how soon or late they telegraph turning points. No single indicator or system is perfect, but if you go by the rule “it’s not different this time,” you will be right much more often than you will be wrong.
Only once in that entire period have I forecast a recession: at the end of 2006, I said one would likely follow in a year or so. And boy howdy did it! Several times since (2018, 2022) I have gone on Recession Watch, and a few indicators even warranted a Recession Warning, but never beyond that. Of course I did not foresee the Giant Flaming Meteor of Death in March 2020, but I think that can be excused!
One important lesson of all this is that it takes an enormous disruption (an oil shock, COVID, a speculative credit implosion in the housing market) to cause the US economy to go into reverse. Otherwise, a disruption on one side is likely to be offset by continued growth elsewhere. A second is that you need to leave your political ideology at the door. A prime example is T—-p’s first term of office, where he was gifted with an economy entering a good growth period, and did not know where the levers of economic power were enough to disrupt it. And so far in his second term, it has withstood both Tariff-palooza! last year, and - so far - the Iran war this year.
So where do we stand now? To cut to the chase, unless the continued closure of the Strait of Hormuz causes gas prices to go to about $6 a gallon or more, there is no imminent danger on the horizon to the economy as a whole. But the benefits of the expansion are very skewed.
A good place to start here is my alternative “consumer nowcast” system. This posits that increased consumer spending can be fueled by several sources: increased real incomes, a decline in financing interest rates, or increased asset prices. Only if all of those fail will consumers pull back and cause a recession.
Here is what real incomes (dark blue), real wages (light blue), house prices (gold, /10 for scale), stock prices (red, /10 for scale) and mortgage interest rates (orange, inverted so that “down”=“bad”, right scale), all look like together:
Both real incomes and wages have turned down this year with the inflation caused by the Iran war. Mortgage rates remain elevated, and so a negative. House prices are flat, so cashing out increased equity is not an option for most homeowners.
But stock prices have increased almost 20% in the past year, creating a huge asset class that can be tapped for spending by the uppermost income tiers. So long as that remains the case, the “consumer nowcast” is not forecasting an imminent recession. That’s a major caveat, because if the AI data center construction boom is in fact a Bubble, when it pops it will take down the stock market with it; and if the other indicators remain negative, then the nowcast would suggest a recession would follow in short order.
Now let’s turn to my other system of long leading, short leading, and coincident indicators. I don’t plan on being exhaustive here, but want to give you a representative look.
The long leading indicators include corporate interest rates, the bond yield curve, real money supply, housing permits, corporate profits, and real retail sales per capita. Several weeks ago I indicated that government expenditures (i.e., any stimulus measures in effect) should also be added. We’ve already seen above that interest rates remain elevated, although they have been at these levels for about three years, so they are now a neutral. And most people know that the yield curve, which had been inverted, have normalized. Here are the two most commonly followed metrics, the 10 year minus 3 month, and 10 year minus 2 year, comparisons; as well as real M2 money supply YoY:
The former regularized about 9 months ago, and the latter over 18 months ago. Historically, by the time this long a period of time has passed since regularization has passed, recessions have been over and a recovery has begun. Additionally, real money supply turned positive almost 2 years ago. In short, these are positive.
Next, here are what corporate profits (/2 for scale) look like in comparison with real retail sales per capita:
While real retail sales per capita declined in 2024, and then were generally flat in 2025, they picked up in the past few months. Corporate profits, meanwhile, with the exception of the first half of last year, have remained very positive. Since these are long leading indicators, this means that the producer side is a positive, while the consumer side remains a neutral (since the trend one year ago was moribund).
Finally, while I won’t post a graph of government expenditures, note that the “Big Beautiful Bill” gave the wealthy lots of more money to play with in the form of tax cuts.
In short, there is a neutral interest rate background, a rebound in the bond yield curve and money supply, and a positive trend in corporate profits. Only real retail sales per capita are troublesome. Absent a shock (like what might happen if the Strait of Hormuz remains closed), these are not forecasting recession in the next 12 months.
Next, let’s examine a general trend in the short leading indicators. Last week I wrote that the “quick and dirty” system of stock prices and jobless claims had had a stellar record in the last 10 years, and was very positive now. Additionally, real retail sales in the aggregate (rather than per capita) were not negative YoY either. Here is a repeat of that graph:
While housing (as shown by units under construction) and motor vehicle sales (as shown by truck sales) have both been recessionary, both have stabilized or rebounded in the last few months:
And although I won’t repeat the graphs, I have written many times in the past few months about the rebound in manufacturing data, like core capital goods orders, the regional Fed new orders indexes, and manufacturing employment and hours. All of these are positive. The only real soft spot has been construction employment and real spending, which has been flat to trending slightly lower.
In other words, the bulk of the short leading indicators have been trending higher as well.
The one big caveat is the real aggregate payrolls, which tend to turn shortly before a recession, peaked in January and have been lower since, although they are not negative YoY at this point:
These are worth a yellow flag. Much there depends on what happens going forward with inflation. But again, the bulk of the short leading indicators are positive.
Finally, in terms of coincident indicators, we did look at real personal income above, noting that it had turned down. Real manufacturing and trade sales turned down in the most recently reported month, but the trend has been higher. Industrial production has also been positive. And finally, employment, growth of which was basically nonexistent for most of 2025, has been mildly positive in the past few months:
In other words, the bulk of the coincident indicators suggest current growth, but that the bulk of average American households may not be participating.
So let me sum up this Big Picture nowcast and forecast of the American economy at mid-year 2026:
1. Almost certainly, we are not currently in a recession, although the bulk of the gains are among the top tier of income earners and the wealthy.
2. The large majority of signs indicate that the economy is not going to tip into contraction in the next few months, although again the real payrolls for the sum of nonsupervisory workers have contracted this year, an important caution.
3. The long leading indicators are most consistent with a rebound going into 2027.
Finally, let me note that all of this can be tossed into the trash can if there is a geopolitical shock. The most likely candidate for such a shock is that the Strait of Hormuz remains closed, and the gamblers in the oil futures markets, who have been betting that it will reopen before the Strategic Oil Reserve is drained to crisis levels, are wrong, causing gas prices to rocket to $6/gallon or higher. Or the Chief Chaos Agent in Washington DC does something else that completely derails the above trends. A second major caveat, as indicated above, is if the AI data center construction boom is a Bubble that pops, the short leading indicators on the producer side are likely to turn negative in a hurry.
