The last post predicted a recession in the United States for Q2 as a result of the fiscal standoff in the United States (link for subscribers here). However, as I have been largely upbeat about the underlying fundamentals in the United States, this call is predicated almost entirely on the outcome of that standoff. This post is just a reminder of what data points we should be looking for as clues to where the US is headed.
First and foremost, we have to look to the definition of a recession in the US. It is not two consecutive quarterly drops in real GDP as is commonly assumed. The National Bureau of Economic Research, whose recession dating committee decides the official beginning and end of US business cycles says it this way on their website:
The NBER does not define a recession in terms of two consecutive quarters of decline in real GDP. Rather, a recession is a significant decline in economic activity spread across the economy, lasting more than a few months, normally visible in real GDP, real income, employment, industrial production, and wholesale-retail sales.
So, clearly we should look at the weekly and monthly time series that are directly related to that view more than the quarterly ones which are not updated enough:
- Personal Income and Outlays
- Jobless Claims
- Employment SItuation Report
- ISM Manufacturing Index
- Factory capacity utilisation
- Retail sales
- Personal consumption
I tilt toward using first derivative analyses of these time series because recession is a period of “diminishing activity” as the NBER accurately says in its FAQs on business cycles. And that means that you are looking for negative ‘deltas’, changes that would signal recession in the time series that matter most to the economy.
As always, I don’t believe you can get to recession, without significant sustained negative deltas to the personal income and jobless claim time series irrespective of what retail sales or industrial production is doing. Personal income leads to changes in outlays and retail sales which feed dynamically into industrial production and real GDP and job( cut)s and back to personal income, meaning you need a sustained downshift in income and outlays that causes a cut back in output and employment to get recession. The feedback loop that I most look for is the personal income and employment feedback because sustained hits to the deltas in these time series are what cause sustained drops in spending and output and recession.