Is the next Recession really coming? (update)

It’s been a while since I’ve posted something as boy it was a really busy time for me lately ๐Ÿ™‚ I’ve managed to site for few minutes and one post cough my eye. More then a year ago I posted about coming recessionย and went trough few indicators. Let’s check how they are doing today:

GDP growth – last time I didn’t mentioned the most important factor for measuring of economy – GDP growth. We all know that economy develops in cycles and we all presume that cycles look like this:

recesion

But in real life it looks like this:

GDP

As you see actual recessions are quite short. Only 1-2y compared to growth periods of +10y. If not a DotCom bubble in 2000 I could even argue that full economy cycle took from 1990 recession to 2008. So almost 20y. This time recovery is visibly slower then it was in 1990-2000. The slower growth acceleration, the longer the growth cycle should be. From what I see 2010-2018 looks a bit flat on ~2% line, while in 1990-2000 was ~4%. So it doesn’t look like a peak to me right now. If that is a peak, it is a very poor one ๐Ÿ™‚

Housing bubble – no bubble yet. If we look at RE growth YoY it look’s very similar to what was in 2002-2003. The growth was stable at 5-7%. Later it has accelerated to +10%. Now housing price growth has accelerated a bit from +5% in Y2015 to +6,5% today. So the growth acceleration is there, but until it is a double digit I think there is no overheating ๐Ÿ™‚ If the growth will not accelerate like it did in 2003-2008 the cycle may take even longer to reach +10% maybe even 10y.

housing

Fed rates – another indicator, which is more how US fed treats the economy. Year ago the rate was at 1% and the increase has continued. Now it stands at 2%. During that time stock market went up and lately it went down staying almost flat compared to what it was a year ago. It’s actually strange as your earnings from bank deposits has doubled and reach 2-3% and you still want to invest into stocks that pay ~1% dividends yield. According to the books rational investors should not invest in stocks that are considered more risky investment over deposits with higher returns. Coming back to recession I would say that 2% rate is not a indicator, but when it will reach 4%, which is estimated to be at Y2020, then I would say it is becoming hot. Either way compared to last year the rate has doubles so the risk of overheating has defiantly increased.

FED

Inflation – another very important trigger. As you can see we had deflation period in Y2015, which was lead by falling oil prices and was not normal for economy growth cycle. Now inflation is back to 2%, which is a normal level. If inflation will continue to climb and reach 4% or more, then we have reached dangerous level. For now it look ok. In ideal world increasing interest rates should stabilize the inflation, but inflation is more impacted by salary growth, which is impacted by unemployment.

inflation

Unemployment – now this indicator signals that its a peak of economy cycle. As you can see unemployment has never been so low in the past. But more important how increased competition in labor market is effecting salaries.

unenployment

Salaries growth – strange thing is that record unemployment do not boost salary growth and it looks to be stuck around 5% growth YoY. As you can see salary growth has peaked to ~7% growth prior to last recessions. So salary growth do not indicates overheating and as inflation looks to be normal.

salaries

Conclusion – all in all I think that US economy is not yet overheated. The only indicator signaling overheating is record low unemployment, but until it start inflating salaries on higher single digit side or even double digit YoY and will push inflation to something 4-5% we should not be in trouble. Logically tougher competition in labor market has to do that sooner or later, butย in theory increasing FED rates should stabilize the situation so its a tough call. I say the situation look very similar to one that was in 2003-2005, but it depends how things will developed further. Either we will accelerate with the growth like it was last time and end up crashing in 2-3 years from now, or we will balance the growth and extend the growth period for another 10y.

Personally I would bet for the first scenario. Why? Because we are humans, and humans are greedy beings that wants to live better right now and not in 10y. This is why people elected Trump, as people want to live better as fast and as much as possible, which is what he is doing ๐Ÿ™‚ Lets see if i’m right. We might also end up with long 10y and stable growth period. One thing for sure what I know is that recession is 1y closer then it was when I wrote about it last time ๐Ÿ˜‰

Now what relates to the market lets see how my favorite ratio Shiler P/E is holding on. Year ago it was at 29.79 and continued to clime reaching 33 and just lately has little bit stabilized and felled back to 31.27 that is is today. Still it looks a bit overvalued. Continued FED rate increase should cool down the market further. On the other hand people are irrational beings so we might end up in DotCom bubble like it was in 2000 despite the increasing FED rates as it was back then.

ShilerPE

What do you think my blog readers about economy, recession and market situation?

8 thoughts on “Is the next Recession really coming? (update)

Add yours

  1. Hi P2035,
    I think you should also check borrowing rates, as it’s quite an important factor leading to recession.
    Anyway, I think that the next recession will not be the same as it was last time so we should consider some other factors as well. A worrying thing is how much debt companies and governments in the world have. Most of it is denominated in USD and with the USD rising during the last year it may create some problems (examples could be Argentina and Turkey but these are too small to have any knock-on effect).
    Also, a lot of countries elect populist governments that are not that friendly to globalization and cooperation which may make it harder to get out of the next recession.
    Honestly, I wouldn’t like to predict when the recession may hit as I don’t feel confident enough if even the best economists fail to predict it often ๐Ÿ™‚
    BI

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    1. Hi BI thanks for such deap insights. Re borrowing rates I think FED rates is the same or you are taliking about something else. Well you may always check the figures, which im doing here. I havent wrote here, but personaly I would also consoder that greatest risk comes from Chia which is overheated for many years now, bus since China goverment can throw billions to keep it growing and they have money for few more decades to fuel this artifitial growth so it might not come, bit I would bet on China for next recesion. US looks quite well balanced as you can see in these charts.

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      1. Sorry, I meant debt levels. E.g. In advanced economies the debt in average is above 100% of GDP now (compared to ~70% in 2007). In emerging economies itโ€™s now above 50% of GDP (compared to ~35% in 2007).
        And I think raising interest rates in US is a good thing to slow the economy down now and be able to lower the interest rate when economy is in recession. In Europe, itโ€™s still at 0% (as the growth of biggest economies was very sluggish), so if the economy gets into recession, there will be limited ways to try boosting it. One way is quantitative easing again but it doesnโ€™t seem to work well.
        And I think you are right about China or emerging economies in general. They are more important now as they now account for 59% of worldโ€™s output, up from 43% ten years ago.
        Sorry for long comment ๐Ÿ™‚

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      2. Its nice to discus with someone who is well informed and understands the matter ๐Ÿ˜‰ Yes debts has increased a lot and thats and issue and will slow down further growth. Just look at Japan. Overdebt country with zero growth for decades.

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  2. There have definitely been some cracks in the housing market, especially as rates have increased. But it hasn’t been a total collapse, more of a slowdown. Every time the sky seems to be falling, we report strong economic numbers, some strong earnings, and the market rallies. I haven’t seen a market like this in a while and it is entertaining to see some of these opportunities continue to present themselves.

    Bert

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    1. Thanks Bert for droping by ๐Ÿ™‚ Well the long growth cycle can be explained by comparably small growth. When GDP grow 2%, salaries and RE price by 5% its not a overheating, but people tend to get exited and accelerate the growth by greedy voice “more more more”. For frugile DGI community it is diferent world, but the majority of people are just like that. What relates to housing. Sales maybe might go down a bit but if you look at the price chart its a steady increase. Last time FED rate increase did not helped to slow down the price growth acceleration. If this time it does, then good for us ๐Ÿ™‚ its not a sigh of recesion, its a sigh that growth is managed and overheating might avoided… for abother 5-10y or so ๐Ÿ™‚

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  3. Hi, nice analisis. I am thinking about taking some loan and buy a flat for renting to at least cover the inflation of my hard erned money. My friends do not buy flats because they think the recession will come and then they could buy cheaper ones. THere are so many different thinking so it so hard. And even economists as someone said do not predict recessions well. Or some predict but how can you know if he is right when tons of others do not agree.

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    1. Hi, Darius. Thank you for your comment. At first its a note that these are US metrix, not Lithuania, so you should not take for grant them re decision to buy/invest in a rental property.

      There is a fact that random exel formula better predicts recession than IMF ๐Ÿ˜€

      My advice would be if you want to invest, invest. If you fear to invest don’t. Simple as that. Don’t listen to others. Its your money. If this is all of your money earned in 20y or so, dont invest in just one apartment. That would be too much. Better buy 2-3 lower value small apartments in less attractive locations. Sure this will create more problems for you to manage these properties…. ah what am I saying. Dont listen to me, Im not rental property investor. Do as you think is the best ๐Ÿ˜‰ Just invest the way that you can afford to lose 1/2 of the investment and not go bankrupt or nuts. That is the key.

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