economic indicators: predicting the next u.s. … indicators...2020/05/27 · 16 predictive...
TRANSCRIPT
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
3FMI Corporation | Copyright 2020
$(100,000)
$-
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$200,000
$300,000
$400,000
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$600,000
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$800,000
$900,0001
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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
4FMI Corporation | Copyright 2020
New Home Sales
0
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Ne
w H
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(00
0s
)
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
Predictive Indicator
500
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19
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c-19
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0
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0
Mar-
20
Past 12 Months
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%
5FMI Corporation | Copyright 2020
Monthly Supply of Houses
Predictive Flag
False Positive
Predictive Indicator
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
6FMI Corporation | Copyright 2020
Quarterly Rental Vacancy Rates
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Re
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Ra
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Recession Quarterly Rental Vacancy Rates Linear ( Quarterly Rental Vacancy Rates )
-20%
-15%
-10%
-5%
0%
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15%
20%
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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
Predictive Indicator
Summary Jump
7FMI Corporation | Copyright 2020
Manufactured Durable Goods, New Orders
$-
$50,000
$100,000
$150,000
$200,000
$250,000
$300,000
$350,000F
eb-9
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urr
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oll
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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
Predictive Indicator
Significant
spike 07/2014
due to aircraft
orders
Summary Jump
8FMI Corporation | Copyright 2020
U.S. Trade, Durable Goods – Balance of Payments (BOP) Basis
$(1,000,000)
$(500,000)
$-
$500,000
$1,000,000
$1,500,000
$2,000,000
$2,500,000
$3,000,000
$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
-30%
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Recession Balance (Exports - Imports)
Predictive Flag
False Positive
Predictive Indicator
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.
9FMI Corporation | Copyright 2020
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
Predictive Indicator
Tech Boom 2.0?►
10FMI Corporation | Copyright 2020
Yield Curve Inversion
Predictive Flag
False Positive
Predictive Indicator
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
11FMI Corporation | Copyright 2020
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
12FMI Corporation | Copyright 2020
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
Predictive Indicator
Q1 2018
Summary Jump
13FMI Corporation | Copyright 2020
U.S. Unemployment
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Un
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plo
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ate
Recession Unemployment Rate
-30%
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0%
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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
Predictive Indicator
3.0
5.0
7.0
9.0
11.0
13.0
15.0
Apr-
19
May-1
9
Jun-1
9
Jul-19
Aug-1
9
Sep-1
9
Oct-19
No
v-19
De
c-19
Jan-2
0
Feb-2
0
Mar-
20
Apr-
20
Past 12 Months
Summary Jump
14FMI Corporation | Copyright 2020
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
15FMI Corporation | Copyright 2020
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
Predictive Indicator
Summary Jump
16FMI Corporation | Copyright 2020
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
17FMI Corporation | Copyright 2020
Other Interesting Indicators…Predictive Flag
False Positive
Predictive Indicator
Summary Jump
18FMI Corporation | Copyright 2020
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)
19FMI 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 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
20FMI Corporation | Copyright 2020
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
27FMI Corporation | Copyright 2020
Supplement
28FMI Corporation | Copyright 2020
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%
29FMI Corporation | Copyright 2020
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