economic indicators: predicting the next u.s. … indicators...2020/05/27 · 16 predictive...

Economic Indicators:

Predict ing the next U.S .

recess ion

Q1 2020 update

2FMI Corporation | Copyright 2020

Predicting the next U.S. recession

*Prediction Strength = Correct Predictions −False Positives

Recessions Considered

16 predictive indicators are listed, 12 (75%) show high risk, 14 (88%)

show moderate/high to high risk, and two (13%) show low risk.

Indicators / MetricsRecessions Considered

Correct PredictionsFalse

PositivesPrediction Strength*

Flag/Warning Timing

Risk Assessment / Trending

PREDICTIVE INDICATORS

Yield Curve Inversion 5 5 0 100% <1-3 year HIGH ↓

Money Supply 7 7 1 86% <1-3 year LOW ↑

New Home Sales 6 6 1 83% <1-3 year MODERATE / HIGH ↓

Unemployment Rate 6 4 0 67% <1 year HIGH ↑

Months Supply of Homes 7 4 0 57% <1-1 year MODERATE / HIGH ↑

U.S. Trade Balance (BOP % Change) 6 5 2 50% ~1-2 year HIGH ↓

Lumber Sales 2 2 1 50% ~1-2 year HIGH ↑

MBS Held by Banks 2 2 1 50% <1-2 year LOW ↑

Copper Price (Doctor Copper) 7 6 3 43% <1-4 year HIGH ↓

Rental Vacancy Rates 9 4 1 33% <1-2 year HIGH ↓

Residential CPiP 6 3 1 33% <1-2 year HIGH ↓

Stock Market Performance 3 2 1 33% <1 year HIGH ↓↑?

Consumer Confidence (OECD) 7 5 4 14% ~1-3 year HIGH ↓

Heavy Duty Truck Sales 7 5 5 0% ~1-2 year HIGH ↓

Manufactured Goods, New Orders 2 1 1 0% <1 year HIGH ↓

Unemployment Claims 7 5 5 0% <1-2 year HIGH ↓

OTHER NON-PREDICTIVE INDICATORS / METRICS • The analysis herein indicates that the U.S. is in preliminary stages of a recession.

• Nearly all (88%) of the predictive indicators above are reading or trending in the moderate/high or high risk territory. Similarly, the non-predictive indicators and metrics have changed course in agreement.

• The most convincing data suggestive of an unavoidable 2020 recession is the rapid rise in unemployment as indicated by the Sahm Rule alongside significant GDP losses reported in Q1 (-4.8%), with further historically catastrophic losses anticipated in Q2. These near-term signals concur with timing analyses conducted on the predictive flags raised in prior quarters, beginning 2019, with multiple yield curve inversion events, a fall in lumber sales and declining copper prices.

• Interestingly, money supply has skyrocketed in recent months as a result of proactive actions by the government and Federal Reserve. It is also thought-provoking to note the stability in bank’s mortgage backed security (MBS) holdings going into a 2020 recession looks quite different compared to the two recession cycles prior.

Nonresidential Buildings CPIP Trending DOWN

Nonbuilding CPIP Trending DOWN

Oil Price (WTI) Trending DOWN

Search Engine Volume Trending UP

Consumer Price Index (CPI) Trending DOWN

Gross Domestic Product Trending DOWN

Consumer Sentiment Trending DOWN

ABI – ↓ / Neg NRCI – ↓ / Neg PMI – ↓ / Neg

Sahm Rule - are we in a recession today? → YES


$(100,000)

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Recession Residential Nonresidential Buildings

Nonbuilding Structures Linear (Residential ) Expon. (Residential )

U.S. Construction Forecast – Q1 2020

* FMI Forecast Q1 2020

Residential – Exponential Trend Line

Residential – Linear Trend Line

In 1992 definitions were re-written by the Census

Forecast

Predictive Flag

False Positive

Predictive Indicator

Of the three primary segments that make up

construction put in place (CPIP), residential is the only

that is considered predictiv e.

Residential construction inv estment fell just before

three of the past four recessions.

Nonresidential construction typically follows the trend,

but lags to some degree and falls once in the recession.

Nonbuilding inv estment improv es in the recession

indicating federal/public efforts to assist widespread

inv estment (ARRA) and economic growth.

Summary Jump


New Home Sales

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Recession New SF Homes Sold Linear (New SF Homes Sold)

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Recession New SF Homes Sold

Summary Jump

-1.2%-1.1%

Conditions where annual home sales peak then fall

signals a flag that a recession is forthcoming. This flag

has strongly and correctly indicated fiv e of the past six

recessions.

Predictive Flag

False Positive


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The trend through most of 2018 was unnerving, but the year ended only

slightly negativ e, down less than 0.5% from 2017. Likewise, mortgage rates

hav e been on the decline since late 2018, in efforts to increase demand.

-0.3%


Monthly Supply of Houses

Predictive Flag

False Positive


Historical data shows when monthly supply of homes reaches or

exceeds eight months, risk of entering a recession increases

substantially. Months supply in December 2018 recently hit 7.4 months

but has since fallen back into a normal/healthy range (under 6 months)

and remains under 6.5 months in both March and April 2020.

Summary Jump


Quarterly Rental Vacancy Rates

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Recession Quarterly Rental Vacancy Rates Linear ( Quarterly Rental Vacancy Rates )

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Recession Quarterly Rental Vacancy Rates

Historical balance in rental v acancy is between approximately 5% and 8%. Conditions

where v acancy rates peak then fall creates an at-risk env ironment likely due to ov er-

building potential. As seen abov e, this slight downward trend/pattern has signaled four

of the past sev en recessions.

Predictive Flag

False Positive


Summary Jump


Manufactured Durable Goods, New Orders

$-

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Recession Durable Goods, New Orders Linear (Durable Goods, New Orders)

Conditions where new orders of manufactured durable goods trend

downward indicate a recession is either in the near future (as seen in

2000) or underway (as seen in 2008).

Interestingly this trend occurred in 2015, likely as a result of the collapse

of oil prices, and rev ersed by 2017 without a recession. This is read as a

sign that the economy had successfully dodged a recession not long

ago. Theoretically, construction inv estment (i.e., residential), the strength

of the stock market (election year, 2016) and consumer sentiment offset

more widespread declines. The oil industry did experience a major

pullback/restructure during this period. Also, manufacturing CPIP

experienced major declines beginning late 2016 through most of 2017.

February 2020 orders dropped at a historic rate of nearly 15%.

In 1992 definitions were re-written by the Census

Predictive Flag

False Positive


Significant

spike 07/2014

due to aircraft

orders

Summary Jump


U.S. Trade, Durable Goods – Balance of Payments (BOP) Basis

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$3,500,000

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Recession Balance (Exports - Imports) Exports Imports

Historically, balance of payments between exports and imports

suggest a high-risk or recessionary economic env ironment when

annual growth rates trend negativ e. This flag has correctly signaled

six of the past six recessions. However, there hav e been two flags

since 2011 without a recession.

Summary Jump

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Recession Balance (Exports - Imports)

Predictive Flag

False Positive


U.S. trade in 2019 experienced a decline in both imported and

exported goods. Declines in imports marginally outpaced exports

and were specifically tied to industrial supplies (including

petroleum) and capital goods. China played a major role in

supplying far fewer imports in 2019 than prior years. Q1 2020 data

supports a continuation of this down trend.


Stock Market PerformanceNASDAQ

Composite

Dow Jones

Industrial

Average

S&P 500

Market Performance, 1971-Current (NASDAQ, DJIA and S&P 500)

Source Yahoo Finance

10-Year and 2-Year Treasury Maturity Rate

Source FRED

Grey bars indicate recessions

Tech Boom 1.0

Similar pattern…

Summary Jump

This chart updated 05/27/2020

The stock market is/was in uncharted territory.

A significant amount of wealth has poured into the

market ov er the past two decades as inv estors search

for returns in a low-to-no interest climate.

Also, just within the past decade the rest of the world

has faced economic unrest (e.g., Greece, Brexit,

China, etc.) making U.S. markets seemingly more

attractiv e.

Predictive Flag

False Positive


Tech Boom 2.0?►


Yield Curve Inversion

Predictive Flag

False Positive


An inv erted yield curv e is an interest rate env ironment in which long-term debt instruments hav e a lower yield than short-term debt instruments

of the same quality.

These charted rates / yields are interpolated by the Treasury from the daily yield curv e. These market yields are calculated from composites of

quotations obtained by the Federal Reserv e Bank of New York . The yield values are read from the yield curve at fixed maturities, currently 1, 3 and 6

months and 1, 2, 3, 5, 7, 10, 20, and 30 years. This method provides a yield for a 10 year maturity, for example, even if no outstanding security has exactly

10 years remaining to maturity. https://www.treasury.gov

The inv ersion point is when the short-term yields are greater than the long-term yields (long-term – short-term = <0). At this flag, based on the

historical data charted abov e a recession can be expected within 12 or 24 months.

Summary Jump

https://www.treasury.gov/resource-center/data-chart-center/interest-rates/Pages/TextView.aspx?data=yield

https://www.treasury.gov/


Oil Prices (WTI)

Oil price v olatility has increased

significantly within the past two decades

alongside the discov ery of U.S. shale

reserv es and hydraulic fracturing

technology.

The swift drop in oil prices seen late 2014 into 2015

sent shockwav es through the U.S. economy…

A similar decline and pattern was seen early 2020.

Summary Jump


Copper Prices

Copper Prices - 45 Year Historical Charthttps://www.macrotrends.net/1476/copper-prices-historical-chart-data

Because of copper's widespread applications in most sectors of the economy (e.g., homes, factories,

electronics, power generation and transmission, etc.) demand for copper is often v iewed as a reliable

leading indicator of economic health.

Rising copper prices suggest strong copper demand and a growing global economy, while declining

copper prices indicate sluggish demand and economic slowdown.

The long-term outlook suggests a supply

shortage in the near future, with prices

expected to rise. This will l ikely spur new

investment in mining activity and signal

extended healthy economic conditions.

Copper Long-Term Supply & Demand

Predictive Flag

False Positive


Q1 2018

Summary Jump

https://www.macrotrends.net/1476/copper-prices-historical-chart-data


U.S. Unemployment

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Recession Unemployment Rate

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Recession Unemployment Rate

Unemployment rates signaled four of the past four recessions.

Logically, major ev ents change the employment climate in one or

more large industries at some point before we fall into recession…

Enter COVID-19 and the resultant economic shutdown.

Looking back,

we were at

high risk of a

recession in

2016 and

2017.

That risk is

elev ated

going into

2020.

Predictive Flag

False Positive


3.0

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Past 12 Months

Summary Jump


Sahm Rule

The rule answers the question

if we are in a recession

today…

Looking back 70 years there

have been no false positives.

It often takes months to years to officially declare a recession.

The Sahm Rule, developed by Federal Reserve economist and consumer section chief Claudia Sahm, signals the

start of a recession when the three-month moving average of the national unemployment rate rises by 0.50

percentage points or more relative to its low during the previous 12 months.

The rule stands out for its simplicity and ability to identify a recession “nearly immediately and long before it has

been officially recognized,” (using monthly employment data) to provide a faster way to trigger stimulus programs.

0.5

Are we…?> YES <

Flag

False Positive

Indicator Signals

Summary Jump


U.S. Consumer Confidence and Consumer Sentiment

Source: University of Michigan, University of Michigan: Consumer Sentiment [UMCSENT],

retrieved from FRED, Federal Reserve Bank of St. Louis;

https://fred.stlouisfed.org/series/UMCSENT, June 3, 2020.

1966 Q1 = 100

Source: Organization for Economic Co-operation and Development, Consumer Opinion Surveys: Confidence Indicators: Composite Indicators: OECD Indicator for the United

States [CSCICP03USM665S], retrieved from FRED, Federal Reserve Bank of St. Louis; https://fred.stlouisfed.org/series/CSCICP03 USM665S, May 27, 2020.

There are apparent ceilings howev er

in both charts, just before a recession

a significant dip occurs…

Per the historical data, it is highly

unlikely that a recession will occur in an

economic env ironment where consumer

confidence and/or consumer sentiment

are trending up-ward / positiv e.

Predictive Flag

False Positive


Summary Jump


Industry Diffusion Indexes

FMI Nonresidential

Construction Index (NRCI)[Contractors]

Q1 Trend: Higher / Positive

53.9 (Q1 2020)

U.S. ISM Purchasing Managers

Index (PMI)[Producers / Manufacturers]

Q2 Trend: Lower / Negative

41.5 (April 2020)

25

30

35

40

45

50

55

60

65

70

Au

g-0

5

Fe

b-0

6

Au

g-0

6

Fe

b-0

7

Au

g-0

7

Fe

b-0

8

Au

g-0

8

Fe

b-0

9

Au

g-0

9

Fe

b-1

0

Au

g-1

0

Fe

b-1

1

Au

g-1

1

Fe

b-1

2

Au

g-1

2

Fe

b-1

3

Au

g-1

3

Fe

b-1

4

Au

g-1

4

Fe

b-1

5

Au

g-1

5

Fe

b-1

6

Au

g-1

6

Fe

b-1

7

Au

g-1

7

Fe

b-1

8

Au

g-1

8

Fe

b-1

9

Au

g-1

9

Fe

b-2

0

In a diffusion index where scores are above 50 the reading represents improving or expanding industry conditions.

Scores below 50 represent worse conditions from the prior month or quarter (industry contraction).

A score of 50 represents industry conditions remaining the same

Summary Jump


Other Interesting Indicators…Predictive Flag

False Positive


Summary Jump


U.S. Consumer Price Index (CPI) and Gross Domestic Product (GDP)

Source: Organization for Economic Co-operation and Development, Consumer Price Index: Total All Items for the United States [CPALTT01USM659N],

retrieved from FRED, Federal Reserve Bank of St. Louis; https://fred.stlouisfed.org/series/CPALTT01USM659N, May 27, 2020.

Source: U.S. Bureau of Economic Analysis, Real Gross Domestic Product [A191RL1Q225SBEA], retrieved from FRED,

Federal Reserve Bank of St. Louis; https://fred.stlouisfed.org/series/A191RL1Q225SBEA, June 3, 2020.

Standardized inflation targets (2 percent) hav e helped stabilize economic growth by eliminating uncertainty across banks as w ell

as factors/concerns in v arious corporate and household decisions. However, one major threat looking forward is that at current

targets, the fed’s monetary policy may be much less effectiv e pulling the economy out of a recession.

The Fed cut short-

term interest rates

to zero in 2008In 2012 the Fed

formally announced

a 2-percent inflation

target

Summary Jump

Q1 2020 GDP losses of 4.8% marked the end of the longest economic expansion cycle in U.S. history (Q2 2009 – Q4 2019)


Predicting the next U.S. recession

*Prediction Strength = Correct Predictions −False Positives

Recessions Considered

16 predictive indicators are listed, 12 (75%) show high risk, 14 (88%)

show moderate/high to high risk, and two (13%) show low risk.

Indicators / MetricsRecessions Considered

Correct PredictionsFalse

PositivesPrediction Strength*

Flag/Warning Timing

Risk Assessment / Trending

PREDICTIVE INDICATORS

Yield Curve Inversion 5 5 0 100% <1-3 year HIGH ↓

Money Supply 7 7 1 86% <1-3 year LOW ↑

New Home Sales 6 6 1 83% <1-3 year MODERATE / HIGH ↓

Unemployment Rate 6 4 0 67% <1 year HIGH ↑

Months Supply of Homes 7 4 0 57% <1-1 year MODERATE / HIGH ↑

U.S. Trade Balance (BOP % Change) 6 5 2 50% ~1-2 year HIGH ↓

Lumber Sales 2 2 1 50% ~1-2 year HIGH ↑

MBS Held by Banks 2 2 1 50% <1-2 year LOW ↑

Copper Price (Doctor Copper) 7 6 3 43% <1-4 year HIGH ↓

Rental Vacancy Rates 9 4 1 33% <1-2 year HIGH ↓

Residential CPiP 6 3 1 33% <1-2 year HIGH ↓

Stock Market Performance 3 2 1 33% <1 year HIGH ↓↑?

Consumer Confidence (OECD) 7 5 4 14% ~1-3 year HIGH ↓

Heavy Duty Truck Sales 7 5 5 0% ~1-2 year HIGH ↓

Manufactured Goods, New Orders 2 1 1 0% <1 year HIGH ↓

Unemployment Claims 7 5 5 0% <1-2 year HIGH ↓

OTHER NON-PREDICTIVE INDICATORS / METRICS • The analysis above indicates that the U.S. is in preliminary stages of a recession.

• Nearly all (88%) of the predictive indicators above are reading or trending in the moderate/high or high risk territory. Similarly, the non-predictive indicators and metrics have changed course in agreement.

• The most convincing data suggestive of an unavoidable 2020 recession is the rapid rise in unemployment as indicated by the Sahm Rule alongside significant GDP losses reported in Q1 (-4.8%), with further historically catastrophic losses anticipated in Q2. These near-term signals concur with timing analyses conducted on the predictive flags raised in prior quarters, beginning 2019, with multiple yield curve inversion events, a fall in lumber sales and declining copper prices.

• Interestingly, money supply has skyrocketed in recent months as a result of proactive actions by the government and Federal Reserve. It is also thought-provoking to note the stability in bank’s mortgage backed security (MBS) holdings going into a 2020 recession looks quite different compared to the two recession cycles prior.

Nonresidential Buildings CPIP Trending DOWN

Nonbuilding CPIP Trending DOWN

Oil Price (WTI) Trending DOWN

Search Engine Volume Trending UP

Consumer Price Index (CPI) Trending DOWN

Gross Domestic Product Trending DOWN

Consumer Sentiment Trending DOWN

ABI – ↓ / Neg NRCI – ↓ / Neg PMI – ↓ / Neg

Sahm Rule - are we in a recession today? → YES


Yield Curve Inversion

Money Supply

New Home Sales

Unemployment Rate

Months Supply of Homes

U.S. Trade Balance (BOP % Change)

Lumber Sales

MBS Held by Banks

Copper Price (Doctor Copper)

Rental Vacancy Rates

Residential CPiP

Stock Market Performance

Consumer Confidence (OECD)

Heavy Duty Truck Sales

Manufactured Goods, New Orders

Unemployment Claims

2019 2020 2021 2022

Q1

Q2

Q3

Q4

Q1

Q2

Q3

Q4

Q1

Q2

Q3

Q4

Q1

Q2

Q3

Q4

< 5

0%

Over the past several quarters, moderate to high risk of recession was

anticipated based on the timing of the flags/signals raised by multiple predictive indicators through early 2019, especially the yield curve

inversions, but also weakness in residential (i.e., lumbar and CPiP) and international production/demand (i.e., copper prices).

M H M L

> 5

0%

Predictiv e Flag Raised / Maintained

High Risk Assessment

Moderate Risk Assessment

Low Risk Assessment

Possible Flag

Predicting the next U.S. recession50%

Pre

dic

tion S

trength


Supplement


CPiP Forecast in Constant Dollars (public/private)

CPiP Constant 1964

Dollars CAGR, 1964-

2019 = 1.4%

Priv ate CPiP Constant

1964 Dollars CAGR,

1964-2019 = 1.4%

Public CPiP Constant

1964 Dollars CAGR,

1964-2019 = 1.2%

U.S. Population CAGR,

1964-2019 = 1.0%


CPiP Forecast in Constant Dollars (by segment)

1.3% (Residential)

1.8% (Commercial)

1.3% (Infrastructure)

1.3% (Institutional)

0.9% (Industrial)

CAGR, 1964-2019

economic indicators: predicting the next u.s. … indicators...2020/05/27 · 16 predictive...

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