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The U.S. Is Getting Closer to a Recession, Data Show (barrons.com)
78 points by paulpauper 4 days ago | hide | past | web | favorite | 74 comments

If there were a way to predict future recessions, and it was reliable, and it was well known to the point of being published on a public web page, then it wouldn't work. As soon as it predicted a future recession everyone would sell their long positions and the recession would happen almost instantly.

There have been ways of predicting market movements in the past that, kept secret by their discoverers, were later turned into trading empires before they stopped working. But there are no ways of predicting future market movements that both (A) work and (B) are on the front page of Hacker News.

1. There already is an incredibly accurate predictor of recessions: the 10 year vs 2 year yield ratio.

2. The NBER defines a recession as “a significant decline in economic activity spread across the economy, lasting more than a few months, normally visible in real GDP, real income, employment, industrial production, and wholesale-retail sales.” It has nothing to do with the stock market.

> There already is an incredibly accurate predictor of recessions: the 10 year vs 2 year yield ratio.

This is not quite true. 2s10s curve inversion is commonly discussed, but 3m UST bill vs 10y UST note has far greater predictive power [0] -- and this indicator does not exist for all large economies. BoJ and ECB factor in curve inversions already, which diminishes their predictive power.

Additionally, some have argued that the US tax policy changes have diminished the signal from the curve (companies repatriating cash tend to hold it in short dated tenors, making the curve steeper than it would otherwise be). Finally, there's argument over whether yield curve inversions are causative or indicative of recession in the US.

[0] https://www.frbsf.org/economic-research/publications/economi...

> If there were a way to predict future recessions, and it was reliable, and it was well known to the point of being published on a public web page, then it wouldn't work. As soon as it predicted a future recession everyone would sell their long positions and the recession would happen almost instantly.

You're equating the behavior of the stock market with a recession, when they're not the same thing. The stock market is correlated, yes, and people talk about it because it can be a leading indicator of the BLS data, but it's not how we define a recession. You can have negative GDP growth with a rise in the stock market, and you can have a dip in the stock market along with positive GDP growth.

Yeah, I was being sloppy in how I was talking there. But if you know there's going to be a recession you'll immediately stop making investments in capital goods, for instance. You'll probably reduce other forms of output too and see if you can lay off some of the workers you know you shortly wont' be needing. This will all tend to cause a recession if everybody does it.

>As soon as it predicted a future recession everyone would sell their long positions and the recession would happen almost instantly.

The dilemma you propose relies upon a conflation of a prediction's accuracy with the prediction's adoption on a universal scale.

You can see the flaw in that logic in this exchange here. Your prediction on how a market would behave given a perfect predictor, if accurate, has not garnered my belief, so the universality of it's adoption has failed regardless of its validity.

How would an algorithmic (presumably?) selloff of stock markets cause a recession?

Imagine you are CEO of a construction engineering company that is traded publicly and whose business is cyclical (or earnings fluctuate widely according to variations in the economy or the cycle of the seasons).

Alright, now imagine the Stock Market sells off on fears of an upcoming recession. What do you do? Well, you may cut investments in that new plant you were planning on building or put a freeze on hiring.

Now imagine, that your competitors, suppliers, and customers hear about this. This type of stuff starts to feed on itself then forecasts are lowered. This becomes self-reinforcing.

This is a simple example of how a sell-off in stocks can cause a recession.

Part of me wonders if we are talking ourselves into a recession, the market is definitely spooked about how China's growth slowdown affects the global economy but in terms of wages and unemployment the US economy still has a long ways to go. For instance African American unemployment is at record lows but still around 6%. Many people are working gig economy jobs and part time and would love a full time opportunity. Growth (discounting tax cuts) is low but stable, so is wages.. so is inflation.

If anything is going to trigger a recession I would put my money on corporate debt, so many companies are loaded with debt that will rear it's ugly head the moment any slowdown in growth is on the horizon. That will trigger lower spending, job cuts, and other means that would bring us into recession.

Recessions are usually triggered by market sentiment...unless a volcano explodes and blocks off the Sun or something like that.

Market sentiment effects it but I don't think it is usually the trigger. Wikipedia doesn't have anything on triggers but I remember my econ textbooks taking about it and there is usually one thing that pushes it over the edge like oil shocks or the housing loan defaults.

Or student loan defaults?

Expectations not being met causing loan defaults causes economic contract. When expectations are not met, then loans begin to be defaulted on and revenue estimates are missed, and future expectations need to be tampered, hence contraction as they are pulled back into reality.

> This matters to investors because, although bear markets are only fair predictors of recessions (seven of 13 postwar bear markets were followed by economic downturns)

Roughly the same predictive power as flipping a coin isn't what I'd call a "fair predictor".

The yield inversion predictor is 100% over the past 40 years with no false positives. The only problem with yield inversion is that it may be 2-years or 3-years early. (2005 yield inversion was followed up by recession in 2007).

Here is a graph of 10-year minus 2-year, a yield inversion is whenever the graph dips below 0%.


The yield inversion predictor is incredibly powerful.


EDIT: Part of the reason for yield inversions to happen is that a large number of people are buying long-term bonds, because they think a bear market will exist. Its better to hold onto a 10-year bond through a recession, because short-term rates will drop during a recession.

We don't quite have a 10-year inversion yet, but we have a 7-year inversion. 5-year yields less than 1-year at the moment. So investors prefer making less money on a 5-year (to guarantee a stable interest rate), rather than 1-year.

That means a large number of people are predicting a recession.

Predicting something 2-3 years early is not a "prediction", it's a failure to predict.

I'll suggest better predictors of the health of the economy would be 1) Record domestic manufacturing output, 2) Most energy security in history (US is now a net exporter of oil), and 3) lowest unemployment since 1969. The US Economy is firing on all cylinders and I wouldn't be surprised if a strong economy runs for another 2-5 years. This is not all that unusual, since the US is returning to a historical average GDP growth rate of 3-4% after an abysmal decade of 1-2% growth.

> 3) lowest unemployment since 1969

What was the US's unemployment in 2007, before the crash? It was 5%.


Recessions CAUSE unemployment. You've got cause-and-effect backwards. First comes recession, THEN comes unemployment. Usually, unemployment happens as the recession recovers.

In 2009, unemployment was 10%. But guess what? The recession was over, and 2010 was one of the best recoveries of all time.

> 1) Record domestic manufacturing output

That's practically a tautology. When US GDP shrinks (and a large portion of GDP is manufacturing), you have the DEFINITION of a recession.


You're looking at historical indicators of a Recession. IE: When everyone is unemployed and the factories are closed, we can look back and say "Yeah, a recession happened 6 months ago". But there's literally NO predictive power in those two attributes.


> 2) Most energy security in history (US is now a net exporter of oil)

While this is likely good policy, it doesn't seem to be indicative of recessions or not. Case in point: we've grown incredibly in the 1950s when we were importing oil. The 80s and 90s were also built on top of foreign imports, but that didn't stop the economic boom times.

I think before you can declare any indicator a success or failure, you need to put into context what decision you are trying to make off the indicator.

If you are trying to decide wether to dump all your stocks into treasury bills in the next 90 days, but before an actual recessionary drop, then yes it's a poor indicator (and likely there is no indicator to answer this question).

But if you're looking at a long term allocation of your assets, or a corporation trying to plan investments long term then maybe it's relevant.

It's hard to look at the long run GDP rate (from the50's on) and think we're going to return to past rates until we fix our inequality problem. They've been inversely related for multiple decades now.

> Predicting something 2-3 years early is not a "prediction", it's a failure to predict.

Why do you say that?

Predicting the economy will experience a recession is like predicting a person will die: you'll be right eventually, but without knowing when, you can't do much useful with that information.

IMO, this is the time for policy makers to start to debate policy changes. It takes over a year for tax laws to have any effect for example, and maybe 2 or 3 years before tax laws really kick in and affect the economy. (First year, people will be typically surprised at their new refunds instead of really spreading it over the year)

Trump's Tax Cuts were written into law in 2017, but only these months (tax season 2019) is when people are fully understanding the scope of the tax law, as it hits our pocketbooks.

A surefire predictor within 2-years or so is good for policymakers, but probably bad for traders.

In December of 1994 the 10 year minus 2 year was at 0.15 (currently it is 0.18 in Feb 2018), but then we had to wait for the next recession until 2001. It could go back up like in August of 1984 or January 1995, or continue downward and put us in a recession in a couple years.

Fair, we're not in a 10-year inverted scenario yet. But we're pretty close.

> (currently it is 0.18 in Feb 2018)

Note that the 1-year is inverted with the 2-year. So while 10year-2year is 0.18, the 10year-1year is 0.1.


The lower-end of the curve is ALREADY inverted. But that's not "the indicator", the 10-year is the indicator that is tracked. Still, seeing the curve invert between 1-year and 5-years is worrysome to me.

This is a less reliable indicator: but when the lower end of the curve inverts, usually the higher end inverts soon afterwards as well.

I think we dipped briefly during intraday trading a few weeks ago.

On the 10-year?

We've definitely dipped on the 5-year and 7-year. But I'm not aware of any inversion on the 10-year (even an intra-day one). Or was it on the Global Bond market? (I think I recall one story about the global bond market becoming inverted...)

Hmmm... do you have a citation by any chance? I'm definitely interested if you can remember where you saw that data, for the full details of the situation.

Turns out I misremembered. I was thinking of the inversion which happened in December, which was as you said, the 3- and 5- year briefly inverted (by 1 basis point).

The problem is there will be a downturn at some point. In some of those cases on your chart the market went up for a while after the negative yield event then turned down. So event y (Recession) is going to happen at some point after event x (Yield inversion).

If some one keeps claiming recession they happen will be right at some point.

Do you have a better indicator of recession?

The yield inversion is ALWAYS within 3-years of a recession. That's pretty darn good in a world where candlesticks and dead cat bounces are your "technical" indicators...

There's even good logic for why the yield inversion is predictive of recessions: because when people buy 10-years (even if the 10-year is a lower-yield than 2-years), it means that people expect the next 2-years to suck.

So its better to lock into a long-term 10-year yield, than to hold onto a better yield for only 2-years.


Note: The 10-year has NOT inverted yet. But it is only 0.10% away from inverting.

Typically business cycles of the us economy last about 38 months. So your "predictor" that comes two years early isn't predicting anything. An analogy would be saying that you can predict 50/100 Blackjack games with 90% accuracy. Sure- you can, but it's a meaningless prediction that has no correlation to any individual game.

Example: https://awealthofcommonsense.com/wp-content/uploads/2015/02/...

I'm not sure if you've studied other "indicators".

But the point I'm trying to make is that we ALL know that indicators in economics are kinda bad. But of all the bad indicators economists have, the Yield Inversion is one of the most powerful, predictive, and correct indicators in existance.

That indicator alone should give people pause. Well, when it happens. The 10-year has NOT inverted yet, but its darn close to inverting.

Hence the good old phrase: "The Stock Market Has Predicted Nine Of The Past Five Recessions"

Yeah, but that doesn't apply to the yield inversion indicator. The yield inversion doesn't have a false positive over the past 40 years.

The 5 times the 10-year yield inverted, were followed by 5 recessions: 1980, 1984, 1991, 2001, and 2008. That's 5 for 5.

When your sample size is 5, claiming your algorithm has a 100% success rate and no false positives isn't saying much at all.

MY sample size is 40 years.

And there are other studies that go back 100+ years with similar conclusions.


So it isn't a perfect indicator over 100+ years, but its still a damned good one. Furthermore, there are solid fundamental economic principles and calculations which back up the thesis. Yield Curve seems to predict GDP (or more specifically: the market participants predict a recession, which causes the market participants to buy/sell bonds in a specific way to make an inverted yield curve).

This isn't some hokey theory positioned by bear websites like zerohedge. This yield-curve inversion is a fundamental attribute taught in major schools of modern economics.


> The historical record does not show this connection to be only a post-WWII phenomenon. The yield curve inverted between June 1920 and March 1921 and again between January 1928 and November 1929.7 Data from the 19th century are incomplete and do not easily lend themselves to analysis.8 Nevertheless, support for the thesis of the yield curve as a predictor of business cycles can be traced as far back as the mid-1800s.9

We're looking at a pattern that has been relatively reliable since the mid-1800s.

Inverted yield curves STRONGLY (but not perfectly) predicts recessions over a period of ~150 years, and perfectly predicted recessions of the last 40 years. This is one of the best indicators of all of economic theory.

> The only problem with yield inversion is that it may be 2-years or 3-years early.

The problem in finance is that early (or late) is often no better than wrong.

Depends on the goal. If you plan to make money off of indicators, well... you can't. Any powerful indicator will be gamed by other investors.

If you are setting policy, it takes years for tax-policies to have an effect on the economy. We can change the tax law today, but it won't really come into effect until next year, or the year afterwards.

On the scale of policy changes, a worst-case 2-year lag on an indicator is perfectly acceptable.

It looks like inversions are 'predicting' boom economies. Recessions follow booms. Here's the chart with real median income added. Notice that inversions coincide with local maxima of median income (stock market level would probably be a better comparison but S&P only lets FRED show the last ten years of their data)


Everyone arguing with you seems to be fixated on how this is framed as an indicator instead of what yield curve inversion actually means and the effects it has that likely lead to a recession.

I don't think that's the right logic.

Say there are ten "events" that have had recessions follow them (or not). Each of these events happened 10 times.

For the first type of a event, a recession happened just once afterwards.

For the second type of event, a recession happened twice.

For the third type of event, a recession happened three times

The third, a recession happened three times.

The fourth, a recession happened four out of ten times.

The fifth, a recession happened five times.


This has very little to do with flipping a coin, and much more to do with deciding the right time to pay attention.

Half a chance of getting hit by a car is not the same as "flipping a coin."

Generally, throughout the past hundred years or so, there has been much less than a 50% chance to enter a recession. I don't know the numbers, but for any given year, it could be 10%. If there is now a 50% chance, isn't that a 5 fold increase in risk?

Yes, this is just pretty simple Monty Hall/Bayes stuff, your example is on point.

50% is 50% better than 0%. If you knew there was a 50% chance you'd die on your way to work today, you'd probably call off work. If you know there's a 50% chance a recession is coming, as an investor, you take similar precautions.

"The U.S. Is Getting Closer to a Recession, Data Show"

Of course the U.S. is - every day we are one day closer to the next recession. It's that nobody knows when that day is. A lot can happen between now and "that day".

But maybe this time we'll be able to prevent it! ;-)

The media loves to point fingers at specific individuals/organizations that are ostensibly responsible for each recession, but there's no known way to completely dampen the oscillations without deep-sixing the economy.

A google search of past failed predictions of recession shows people ,including experts with PHDs, are generally not good at this. In hindsight they can explain why the economy went into recession but are hopeless at predicting when

These articles on the “coming down turn” are written in such a way that they seem so matter of fact.

The article basically says that they had people study past recessions and therefore the markers are there, but things in the real world don’t work like this at all. They say that the tax cuts extended the bull run for two years but now it’s over, as if they are 100% sure.

Fidelity who, I guess, sponsored the study should follow its own advice that they give their customers “Past performance does not guarantee future results”.

Therefore I just feel these people are shorting the market and trying to move things in their preferred direction.

However, in reality no one knows what will happen next and no Model can tell us. There are so many variables at play right now in our modern economy and saying that there will be a recession in the future is like saying everyone has to die at some point.

Hitting close to home, I wonder which software companies would survive and where would VCs be willing to invest during a recession?

During the dot com bust in 2000, my local job market for developers full of just regular companies writing internal apps wasn’t affected at all. The company I worked for in the bill pay industry, kept humming along.

During the 2008 recession things were a lot crazier until 2011. The investors weren’t willing to invest in our pivot from writing software for ruggedized Windows Mobile/Windows CE devices for large companies to smart phones.

I would think that companies working in the health care industry would still be attractive.

Software-wise it really seems like it depends on how bad things really get. SaaS spend might actually be relatively sticky if sales across the board decline but there aren't widespread business failures on the idea that it's replaced internal infrastructure required to run the business.

FWIW, my girlfriend recently interviewed with two of the FAANG companies, and both said they are planning for a doubling of headcount within ~2-5 years.

I really dont think that lack of growth of the quantity of goods produced for a few quarters is really so big of a deal

This is how recession and depression are defined, when gdp simply isnt growing a fraction of a percent quarter over quarter. Is this really a proxy to give insight into everything effecting the general population? The words recession and depression are loaded with so much more than what they actually track, I think just saying them slows down the business spending and lending facilities more than the actual trend of printing slightly lower gdp numbers per quarter.

I think we're already in it.

Over the past year or so, each of my friends from a broad swath of industries say their company is going through layoffs. Almost across the board, everything from marketing to engineering.

U.S definitely is not in a recession. https://www.calculatedriskblog.com/2019/02/bls-job-openings-... : BLS: Job Openings Increased to Series High 7.3 Million in December .

"Professional forecasters see economic growth easing to 2.4 percent in 2019." "The unemployment rate is forecast to average 3.6 percent in the fourth quarter of 2019, down slightly from four quarters earlier." : https://www.stlouisfed.org/publications/regional-economist/f...

Not a recession.

There are always companies laying off. A boom doesn't mean no one is laying people off. On average the overall economy is growing.

Yes, sometimes a company needs to get rid of one type of employee or a particular division while staffing up in other places.

Unemployment is very low and we are adding jobs. I usually get 2-3 recruiters/week contacting me. However you do some seem some layoff stories too. I am wondering where these jobs are going.

In the year over year employment by occupation stats, the unemployment rate for Management, professional, and related occupations and Sales and office occupations is a small bit higher but the overall number is still lower because of increased employment in production and service jobs.

Source: https://www.bls.gov/news.release/empsit.t13.htm

Low unemployment is good for obvious reasons, but like the inverting of the yield curve rate, it's been a predictor of the last few recessions. After it bottoms and starts to move into an upwards trend a recession tends to follow.

Perhaps there is a lot of involuntary part-time employment (people want but can't get full-time jobs)? This would lower the unemployment numbers, but not accurately reflect many people's situations.

Not all jobs are equal. Are the jobs we are adding good ones? or desperate ones?

https://www.cnbc.com/2019/02/01/nonfarm-payrolls-january-201... : On a year-over-year basis, though, [wages] still amounted to a 3.2 percent increase, consistent with the past few months and around the highest levels of the recovery.

Higher wages are a good thing.

As rgbrenner noted, 1% growth after inflation. For the average salaried American that’s around $1/day increase. Not enough for a gallon of gas or a Starbucks coffee.

That's 1% wage growth after adjusting for inflation.

Fair enough, we should adjust for inflation.

From Brookings : "Real median household income grew roughly 1.6 percent in 2018" https://www.brookings.edu/blog/up-front/2019/01/31/household...

Median household income : $60K . $60K * 0.016 =$960.

note the reason for using household income: it includes those who were previously unemployed. It's a way of blurring the line between the average person's earnings and unemployment. Of course if we want to know the unemployment rate, there are separate stats that clearly show that. The only reason to include it here is to make wage growth look better than it would otherwise.

Removing those who found a job, we get back to the lower 1% number. And a big part of that is people just working longer hours.


Desperate ones. But starting the year before last we finally got some wage pressure, which means the situation is going to improve slightly for a few moments before recession.

The thing about recessions is you don't when it started or ended until after the dust settles and you can collect data.

> in June the economy will celebrate a decade of recovery from the Great Recession

Or the US already suffered a mild recession in 2015 and the recent higher growth is a bounce out of that.

S&P 500 corporate profits contracted for four straight quarters from mid 2015 to mid 2016. Sales contracted for six straight quarters.[1]

From July 2015, to November 2016, manufacturing employment contracted slightly (essentially was flat). Manufacturing employment has exploded higher since that month.

The U6 unemployment rate was stuck between 10% and 9.6% between Sept 2015 and Oct 2016.

The civilian labor force participation rate for 25-54 year olds (the single most important participation rate), was fairly stable from January 2013 until mid 2015 (after finding a new general floor post great recession), and then suddenly plunked to a new post great recession low of 80.5% in July 2015. It has been setting higher lows and higher highs ever since that drop.

Consumer confidence, which had been rising persistently for years post great recession, stopped going up and then declined from early 2015 through early 2016.

The S&P 500 index was near a peak in May 2015 at around 2134, then proceeded to go nowhere for a year to ~June 20 2016 when it was at 2032. During that weak year, it hit a low of around 1810 (~15% decline).

The small business confidence index tanked from the first quarter of 2015, until early to mid 2016.

The markit US manufacturing PMI began tanking from a high in mid 2014, until it bottomed out in the second quarter of 2016.

The consumer price index had been rising for years post great recession, stopped rising in mid 2014, flattened out until Oct 2014, plunked lower until Jun 2015, then proceeded to go nowhere for another nine months. In net the consumer price index went no higher from Jun 2014 until Mar 2016. The price index then resumed climbing after Mar 2016. That ~20 month dead spot was the longest post great recession.

In 3Q15 GDP growth dropped dramatically from the prior five quarters, to 1% (3Q14 was 4.9% by comparison). 4Q15 GDP growth dropped further to 0.4% (4Q14 was 1.9%). 1Q16 was 1.5% (1Q15 was 3.3%).

If you've got 1% and 0.4% quarterly growth back to back, with a near zero fed rate, what you've got is a recession.

There are countless more data points that indicate the US suffered a mild recession at some point over that year.

[1] https://www.wsj.com/articles/corporate-profits-set-to-shrink...

> If you've got 1% and 0.4% quarterly growth back to back, with a near zero fed rate, what you've got is a recession.

No. If you've got two quarters back to back with negative growth, then you've got a recession. That's literally the definition.

And in the long run we re all dead

My God, the grammar of that title.

I'm from Europe and I remember very well the 2008 financial crisis. The corrupt banks in America and their massive bailout waved over the ocean and crashed the markets here in Europe, then I was pretty young and I could hardly understand how the housing loans there can lower my salary here. It's funny how naturalized the language is, as if markets are some natural force that goes up or down independent of people's will. Living under capitalism at it's best.

You missed the UK based banks and financial institutions that were acting just as badly, such as RBS and others?

Or even in Iceland, which was notable because they allowed their banks to fail for the role they caused in the recession?


Europe is by no means some kind of ethical banks paradise, we've had our Greece crisis which was just as corrupt. Still, talking about 2008 meltdown the USA played the major part IMHO

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