The Evidence Against a Recession—For Now

The economy is not crashing, despite the Federal Reserve unconventional stimulus. In fact, a number of metrics suggests 2016 may be better than 2015.

By Gene Epstein 
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Photo: Pixabay
 
 
Is the U.S. economy headed for another recession? Of course it is. As soon as one recession ends, the economy is always headed for another. Especially in this cycle, the ultralow interest rates maintained by the Federal Reserve have virtually ensured the buildup of financial excesses that, once corrected, will likely cause a contraction in overall output.

Those were my introductory remarks (repeating my lead in a May 28 Barron’s cover story about the inevitability of market crashes), as part of a panel on the economic outlook at a conference held each July in Las Vegas called “Freedom Fest.” While there is always plenty to be festive about at this four-day event, prognostication sessions are often punctuated with talk of “economic Armageddon”—the very words of one my colleagues on the panel.

Free-market economists who are sensitive to the heavy hand of government tend to err on the side of pessimism. So I began by speaking of the inevitability of recession in order to establish my bona fides in this company. I share the view that the government does far more to destabilize the economy than to stabilize it.

With all that said, however, I outlined my reasons for believing that Armageddon is not about to happen. In fact, economic growth in 2016 could even show a pickup from 2015’s dismal rate.

IRONICALLY, IT MAY BE that the very sluggishness of this expansion—the slowest on record—has been a key reason why excesses have not yet become apparent. In the housing market, for example, it was reported last week that the slow and steady rise in the purchase of existing homes continues, at an annualized rate in June of 5.6 million units—a nine-year high, although way down from the 7.1 million average of 2005, or the 6.5 million average of 2006.
And back then, there were fewer households headed by someone 25 and older that might be in the market for a home.
 
Back then, however, there was also a housing bubble that was about to burst. But while the median price of an existing home rose to $247,700 in June, it was still lower, in today’s dollars, than the July 2006 peak of $275,000.

The stock market has also been remarkably free of irrational exuberance, based on a fairly solid indicator, the dividend yield. The yield on the WisdomTree Dividend Index, which covers the nearly 1,400 companies that pay cash dividends, is at 3%, even though the yield on the 30-year Treasury bond has plunged to 2.3%. Back in July 2007, the yield on the dividend index was 2.9%, against a 30-year T-bond yield of 5.1%. Based 

Speaking of interest rates, one fairly reliable indicator of imminent recession is a flat or inverted yield curve. Normally, long-term rates are higher than short-term rates. But when the yield curve goes flat or inverts, short-term rates are equal to or greater than long-term, and a recession generally results. Right now, the difference between the 10-year Treasury note and the three-month Treasury bill is 125 basis points, or 1.25 percentage points, indicating a relatively normal yield curve.

Finally, there is the remarkable performance of new unemployment insurance claims (see chart). Virtually every recession is preceded by an increase in claims from the same month a year earlier. But not only have claims been running at historic lows, they keep falling to ever-lower lows, most recently at 7% below that of the same month a year ago.

On Friday, the Bureau of Economic Analysis will report the first estimate for gross-domestic-product growth in the second quarter. Look for growth at an annualized rate of 3% or greater.


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