The US economic expansion that began in mid-2009 has been much weaker than average, but, as indicated by the chart displayed below, it is also much longer than average. In fact, it is simultaneously the weakest and the second-longest expansion on record. Due to the advanced age of the expansion and the signs of weakness that have appeared over the past three months in economic statistics and the stock market, recession warnings are becoming more common. However, when we take an impartial look at the most reliable leading indicators of recession we arrive at the conclusion that these warnings are premature.
The three leading indicators of US recession that we care about are the ISM New Orders Index (NOI), Real Gross Private Domestic Investment (RGPDI) and the yield curve. Not one of these indicators is close to giving a recession warning, which is why we say that the increasingly-common warnings of recession are premature.
The NOI, for instance, has declined each month since making a 13-year high in December-2017, but it remains far above the level that it would have to drop below (the red line on the following chart) to warn of a recession.
Also, there are not even tentative signs of major trend reversals in either RGPDI or the yield curve. That’s because last month the US yield curve became its flattest in more than 10 years (a recession is signaled by a major shift from flattening to steepening) and because the data published at the end of last week revealed that RGPDI hit a new all-time high in Q1-2018. RGPDI’s trend generally reverses downward at least two quarters prior to the start of a recession.
Note that the vertical red lines on the following chart mark the starting points of the last two recessions.
Based on the latest data, we roughly estimate the recession start-time probabilities as follows:
– Q2-2018: 0%
– Q3-2018: 10%
– Q4-2018: 30%
– Some time in 2019: >80%
The main reason for our high 2019 recession probability estimate is the decline in the G2 (US plus euro-zone) monetary inflation rate illustrated by the following chart. The inflation rate bounced in March, but it’s likely that the preceding decline was large enough to bring the artificial boom to an end.