Many important economic indicators are showing an obvious
negative trend. If you would have seen
this trend in the past (before the Great Recession) you would have concluded a
recession was imminent, and most times, you would have been correct. Our current conditions point to recession
under normal circumstances, but conditions are still far from normal.
For most of this recovery manufacturing has led the way,
while services and housing have lagged. Currently,
some analysts are saying we are in a “manufacturing recession” but, at the same
time, the service sector and housing are performing much better. It should be noted that if we are in a
manufacturing recession, it is currently a very mild one, with the ISM (purchasing
managers) index just under the magic “50” neutrality number.
My index that tracks discretionary spending continues to
show solid growth, no doubt helped by the “low gas price” dividend. The Restaurant Performance Index shows that
people are continuing to spend some of this “bonus” for dining out. So, even though
certain sectors of the economy are on a downward slope, the economy is expected
to continue to cycle within a restricted range.
I believe this is how this restricted range works:
The economy was overheated and running wild in the run up
to the Great Recession, then it spun out of control and started to do
significant damage. The government tried
to grab hold of it, but it was like trying to catch a greased pig. With all the turmoil and calamity, maybe it
was more like trying to grab a slick wild boar.
The government was finally able to stop the damage by
exerting extreme force over the economy, controlling interest rates, manipulating
the money supply, huge bailouts, and, to some extent, regulating the entire
financial system. They then put the pig
in a pen. The pig can move around but is
limited by the barriers surrounding it. The
pig never moves to the top or bottom of the pen very forcefully because of the
limitations. When the pig runs into to
the top or bottom wall, it instinctively moves back to the middle of the pen.
They scrubbed the grease off the pig, they wrote new rules
for the pig, and they nurtured and lectured the pig on proper behavior. They basically have subjected the pig to the
equivalent of helicopter parenting. You
could remove the pen and let the pig run free; however, you don’t know what
would happen. Would you get a nice,
clean pig which exhibits proper behavior after years in the pen, or would the
wild boar reemerge and start wreaking havoc like before?
This was a topic for debate in the last election. One argument was to give the pig more freedom
and incentive, the other argument was to keep him in the pen. The pen strategy prevailed. You do tend to
want to keep the pig contained, if you doubt your ability to manage it after
it’s loose.
The good news is that the pig is prevented from going too
far south; the bad news is that it is limited in traveling north. So we sit in this cycle where the pig moves
around, but never really goes too far in either direction.
Therefore, it appears that the economy is just experiencing
one of its muffled down cycles. We have
this anemic 0.7% GDP growth for 2015Q4, but the Wall Street Journal Economists
Panel is forecasting 2.4% in Q1, and 2.5% growth in 2016 (FTR is at 2.2%). So, ho hum, nothing to see here, please move
along.
A check of the Economic Cycle Research Institute (ECRI)
Weekly Leading Index Growth Rate confirms this.
This indicator had been a very reliable predictor of recessions in the
past. This index did take a dip in
January, just as it did in 2011, 2012, and 2014…and ECRI is not warning of a
recession in 2016.
Of course, world economic turmoil could change this. It would, however, be the equivalent of removing
the south end of the pig pen. Our
government would then be challenged with recapturing the pig and would no doubt
return it to the pen; because “you see what can happens if the pig is allowed
to run free”.
Unfortunately, one of these times when the economy cycles
down, it will not stop, but keep declining into a recession. When that happens people will look at all the
charts that were going negative beforehand and exclaim, “How could you have
missed that? It was so obvious!” Yes, just as obvious as the numerous times
during this recovery when the economy cycled down and then cycled right back
up.
Recessions are very difficult to predict under normal
conditions, the next one will be even more difficult to forecast. We may not even find out about the next recession
until after it has already ended. I can
confidently say we will not have a recession – until, of course, we do.
This post first appeared on the FTR website. FTR is the leader in analyzing and forecasting the commercial transportation industry. For more information on FTR reports and services, please click here.)
