We’ve never before had the kind of monetary expansion we had during COVID.
So, this probability model (first conceived in 1998) may or may not be applicable.
Still in 1998 a pair of west coast economists considered the five most recent recessions and considered the thousands of types of data (unemployment, changes in unemployment, interest rates, changes in interest rates etc.) and found that exactly 4 of them rise or fall (reliably) 4-6 months before a recession.
Those for “reliable predictors” are
non-farm payroll employment,
the index of industrial production,
real personal income excluding transfer payments, and
real manufacturing and trade sales
They slapped them together into a single “probability” and these are their results
According to their model, things can change quickly, not in six months.
By their model there is less than a 1% chance the US enters a recession in 6 months.
Note also that, as always in economics of recession, we have fewer than 10 examples. Trying to create an ironclad mathematical rule based on fewer than 10 points of input is a guessing game.
By contrast, the conventional “lump-together” of leading economic indicators says we will be in a recession very very soon.
We have never had this much “free money” floating around, so it is hard to know which indicators to trust. (That’s part of the reason I posted seldom-used logistics data on another thread.)
Large corporate bankruptcies have begun to speed up to levels last seen during the past two U.S. economic recessions, signaling a struggle by more businesses to stay afloat as the Federal Reserve’s interest rate hikes take a toll.
Weekly bankruptcy filings have approached their highest level since the COVID crisis started in 2020 (see chart), recently touching almost eight filings per week, based on a four-week moving average, according to Torsten Slok, chief economist at Apollo Global Management.
As per David Rosenberg’s research on a model that indicates the economic finances of a country, there is an 85% chance that the US might face a recession this year. He called this indicator the ‘full model’ which is wholly based on the National Bureau of Economic Research paper demonstrating several financial metrics. David convincingly says the number out loud as the model exhibited one of the highest percentages since the 2008 Great Financial Crisis.
There are plenty of economic models (plenty of data) suggesting a recession will come in the near term. I’d have no problem posting a half dozen or so of them But the one that trumps them all is “What does the Fed do with the M2.” (M2 being a measure of the effects of interest rates, QE etc…)
The Fed looks at the same data, and says “A recession is coming, we had better take action to avoid it.” ← This is not a jab at the Fed, this is, in the minds of many, exactly what the Fed is supposed to do.
Below is a simple, static chart of the M2. It’s not very sophisticated, but it is great for describing the basics.
Anyway, the Fed says “A recession is coming, we had better take action to avoid it.” It then takes action, the red arrow turns into the orange arrow, turns into the green arrow. There are all sorts of risks involved with an M2 that is so far elevated above normal, BUT in the short term at least, as long as the arrow is green and not red we are heading away from recession, not toward one.
A while back (red arrow) there was all sorts news indicating a recession is coming.
Now, (green arrow) the risk shifts back to inflation bubble etc…
You know how when a really, really, really, ridiculously large balloon pops and the explosion is so intense that it condenses moisture out of the air for a split second?
LOL I never thought about the moisture thing,
but yeah, that much M2 being helicoptered into the economy all at once creates a heck of a bubble.
The Fed was raising rates etc. to try to deflate the bubble,
then the Fed said “wait! we are acting to fast” and reversed course
(enacted a number of short-term temporary programs.)
Chart below ends last July (when the arrow in the above graph was still amber.)
The point is to illustrate that
The US economy has NEVER kept more than 60% of GDP as cash on the sidelines.
The odds of the economy tipping into a recession are “very high,” as the US is poised to see a wave of unemployment and a major drop in consumer spending.
That’s according to Joe LaVorgna, the chief economist of SMBC Nikko Securities who’s among the few on Wall Street still sounding the alarm about the risk of a coming recession, as forecasters adjust their outlook amid a strong economy and resilient labor market.
But a no-landing scenario is a “silly” concept to even think of, LaVorgna said in a recent webcast with Rosenberg Research, estimating that the odds of a recession are between 49%-51%.
Very high? Well given the above chart (showing M2 very high but falling fast) a recession soon is not likely. However the M2 totally ignores if an economy is K-shaped.
When I looked in 2022 and 2023, and tried to predict “When recession?” I got a pretty broad range, so broad I had to say things like “but that is so far away anything can happen in the meantime.”
Here is another chart. It uses a much more narrow definition of money and is a favorite among goldbugs and bitcoin enthusiasts (and BRICS cheerleaders??)
That red arrow at the end indicate Fed intervention. It is short term good, but long term bad. Frankly, between (1) housing prices, and (2) SS, and (3) the spiraling debt I think we have ■■■■ on the younger generation enough and it is time for old folks to start pulling our own weight for a change.
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