Key Indicators Suggest Recession Could Be Ahead
The U.S. economy remains fragile. A recession could become reality sooner than many think. Don’t ignore the indicators. Be very careful if you are heavily invested in stocks.
Before going into any details, know this: a recession is when a country’s gross domestic product (GDP) declines for two consecutive quarters.
Now, looking at the U.S. economy, if you look at the headline economic data, we are told that everything is great. The U.S. economy is resilient. The GDP growth rate is stellar, and we continue to be in expansionary mode.
Before you buy into that narrative, you have to know one thing: the U.S. economy is consumption-based. Consumption makes up roughly 70% of the country’s GDP. So, if it declines a little, the U.S. economic growth rate drops a lot.
As it stands, consumption statistics are turning in the opposite direction. This is not good. The U.S. economy may be fine for this quarter and the next. But it has to be questioned whether this trend can continue for an extended period.
For example, look at the chart below. It shows the auto inventory/sales ratio. This ratio indicates how many months of sales it would take to clear out the existing inventory.
This chart suggests that automakers aren’t selling enough cars, so their inventories are going higher. The last time the auto inventory/sales ratio was this high, the U.S. economy was already in a recession. Is this ratio telling us something?
But the auto inventory/sales ratio is just one example. Look at another chart below.
The chart above shows the year-over-year percentage change in monthly industrial production figures of durable consumer goods. Durable consumer goods are things that last for a long time. Think of objects like furniture, appliances, and other such items.
The overall trend since late 2014 has been downward. Durable consumer goods production has been witnessing negative growth for the past two consecutive months. The last time something like this happened was back in 2012. Prior to this, the U.S. economy was in a recession.
U.S. Economic Outlook: Recession in Early 2018?
Dear reader, it takes a while for economies to turn. We are starting to see early indicators warn that a recession could be around the corner.
Don’t forget, interest rates in the U.S. are also moving higher, and interest rates and consumption have almost an inverse relationship. As interest rates go higher, consumption will decline further.
Keeping all this in mind, it would not shock me to see headlines in early-to-mid-2018 along the lines of “U.S. economy unexpectedly falls into a recession.”
What does this mean for stock investors?
Usually, stocks tend to move ahead of the economy. If more recession indicators flash red, don’t be surprised to see a sell-off on the key stock indices. We could see this happen in early 2018. Obviously, with time we will know more. But, since key stock indices are moving higher these days, it wouldn’t be a bad idea for investors to focus on capital preservation.