Its been a while since I’ve posted something lately as buy I have to say it was a really busy time for me, but tough I’ve site for few minutes here and one post cough my eye. More then a year ago I posted about coming recession and went trough few indicators. Would like to check how did they changed in that year:
GDP growth – last time I did not mentioned the most important factor in which economy is measured is GDP growth. We all know that economy develops in cycles and we all think of cycles look like this:
But in real life it looks like this:
As you can see actual recessions is quite shot 1-2y compared to growth period of +10y. If not the DotCom bubble in 2000 I could even argue that full economy cycle took from 1990 recession to 2008 or almost 20y. This time recovery is visibly slower then it was in 1990-2000 so I could argue that the slower the growth accelerate, the longer the growth cycle will take. From what I see 2010-2018 looks a bit flat on 2% line so it should not look like a peak to me.
Housing bubble – no bubble yet. If we look at RE growth YoY it looks very similar to what was in 2002-2003. The growth was stable at 5-7%. Later as you can see it has accelerated to +10%. The trend is there, housing price increase was more or less stable increase from 5% in Y2015 to +6,5% today so the growth acceleration is there, but until it is double digit I think there is no overheating 🙂 If the growth will not accelerate like it did in 2003-2008 the cycle may take even longer to reach +10% maybe even 10y.
Fed rates – another indicator, which I would say more indicates how US fed treats the economy. Year ago the rate was at 1% and the increase has continues and 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. Its actually strange as your earnings from bank deposits has doubles 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 chose stocks that are considered more risky investment over deposits with higher returns. Either way coming back to recession indications I would say 2% 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. But compared to last year the rate has doubles so the risk of overheating has defiantly increased.
Inflation – another very important trigger. As you can see we has 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 I would say is a normal level. If inflation will continue to climb and reach 4% or more, then I will say we reached dangerous level. For now it look ok. In ideal works increasing interest rates should stabilize the inflation, but inflation is more impacted by salary growth, which is very closely impacted by unemployment.
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 even prior to 2000 and 2008 declines, but it is more important how increased competition in labor market is effecting salaries.
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. Salary growth do not indicates overheating and as inflation looks to be as normal.
Conclusion – So all in all I think that economy is not yet on the overheating. 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 above 4-5% we should not be in trouble. Logically tough competition in labor market has to do that sooner or later, but in theory increasing FED rates should stabilize the situation so its a tough call. I say the situation look very similar as it 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 be for the first scenario. Why? Because we are humans, and humans are greedy beings that wants to live better and not in 10y but as fast as possible. 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 🙂 Lets see if i’m right. We might also end up with long 10y or so and stable growth period, but one thing for sure what I know is that recession is 1y closer then it was when I wrote about it last time 😉
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 and continued FED race increase should cool down that 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 increase FED rates as it was back then.
What do you think my blog readers about economy, recession and market situation?