A Recession Could Be Nearing
If you think the U.S. economy is doing just fine, pause and reflect. A recession could be brewing. There’s a lot of economic data that says it might be inevitable.
Investors beware. Pay very close attention to the three charts featured below. They foretell a bad story for the U.S. economy.
Whenever This Happens at U.S. Manufacturers, a Recession Follows
The chart below plots the year-over-year percentage change in new orders of durable goods at U.S. manufacturers.
Pay very close attention to the gray areas behind the chart. Those areas show when there were recessions in the U.S. economy.
(Source: “Manufacturers’ New Orders: Durable Goods,” Federal Reserve Bank of St. Louis, last accessed July 25, 2019.)
Notice something interesting?
Whenever the year-over-year percentage change in new orders of durable goods at U.S. manufacturers turned negative, a recession followed. It happened in 2000 and then again in 2007–2008.
What’s the problem? In the second quarter of 2019, orders of durable goods at U.S. manufacturers declined 2.1%.
Yield Curve Just Entered a Dangerous Territory
Yield curve is one of the most powerful economic tools. Economists use it almost religiously. Yield curve is essentially the difference between the yields on long-term and short-term U.S. bonds.
Here’s the thing: whenever this difference becomes negative (the short-term bonds have higher yields than the long-term bonds), a recession follows a few quarters later.
Look at the chart below. Again, pay attention to the gray shaded areas that represent recessions.
(Source: “10-Year Treasury Constant Maturity Minus 3-Month Treasury Constant Maturity,” Federal Reserve Bank of St. Louis, last accessed July 25, 2019.)
The yield curve just became negative. Economists describe this phenomenon as the yield curve being “inverted.” The current yield curve is saying a recession could be ahead.
Auto Inventories Tumbling
Lastly, look at the below chart of domestic auto inventories. It’s an interesting one to say the least.
(Source: “Domestic Auto Inventories,” Federal Reserve Bank of St. Louis, last accessed July 25, 2019.)
Over the past few quarters, there has been a sharp decline in auto inventories. Between the second quarter of 2017 and the first quarter of 2019, domestic auto inventories declined 36%.
Whenever auto inventories see a quick drop, a recession could be few quarters away.
What Happens if a Recession Is Ahead?
Dear reader, during the last recession, the Federal Reserve and the U.S. government acted as a tag team and did whatever was necessary to pull the economy up.
In the next economic slowdown, don’t be shocked to see the same. But this time around, it could take a lot more effort. The next recession could require a lot of stimulus to boost the economy. Don’t be surprised to see negative interest rates by the Federal Reserve and immense budget deficits by the U.S. government.
To investors, I can’t stress this enough: don’t ignore the indicators foretelling a slowdown ahead. If you get complacent, you could be setting your portfolio up for disappointment.
Keep in mind, markets tend to top just before economic data starts to turn, they sell off when the data becomes gruesome, and they bottom at the peak of uncertainty.