Recession doesn't appear imminent: here's what to watch for

Scott Hansen, BridgeTower Media Newswires

When evaluating the health of the economy, there are both leading and lagging economic indicators to consider. Leading indicators are those that change prior to an economic adjustment and can be used as a predictor of future trends. Lagging indicators are just that, indicators that reflect economic historical performance and are only identifiable after a trend has been established.

According to the National Bureau of Economic Research (NBER), the average length of economic expansions in the United States going back to December 1854 is 39 months. The current U.S. economic expansion that began in June 2009 is approximately 115 months old. This tells us that the U.S. economy, in historical terms, is “overdue” for some kind of contraction. While contraction or recession does not seem to be upon us, there are some indicators to keep an eye on for signs of change.

One of the most widely monitored views of economic health is the Conference Board Leading Economic Index. The reading for the LEI for the U.S. increased 0.2 percent in November to 111.8 (2016 = 100), following a 0.3 percent decline in October, and a 0.6 percent increase in September.

“The LEI increased slightly in November, but its overall pace of improvement has slowed in the last two months,” said Ataman Ozyildirim, director of Economic Research at The Conference Board. “Despite the recent volatility in stock prices, the strengths among the leading indicators have been widespread. Solid GDP growth should continue in early 2019, but the portions of the LEI suggests the economy is likely to moderate further in the second half of 2019.”

There are a few key things to watch for in these indicators to get an early read on any impending recession. The first and arguably most informative is the movement of interest rates in relation to each other or the yield curve. A normal yield curve shows short-term rates well below long-term rates. An inverted yield curve, which is a historically reliable indication of economic change, occurs when short-term rates jump above those of the long-term instruments. Currently long and short rates are very close together, with the 2-year at 2.50%, 10-year at 2.66% and the 20-year rate is at 2.83%. While this is not an inversion, it is a relationship to be closely watched.

Also the movement of the stock market —or specifically the broad index that is the S&P 500 — is to be closely watched for any sign of recession. The market has experienced a notable increase in volatility since fall 2018. The S&P 500 peaked in early October at 2930 and found a near-term bottom in December at 2350, which represents a 580 pt. retracement or a 19.8% movement.

Normally a pull-back in the market of this magnitude would be a caution signal for those looking for signs of an impending recession. However, this increased volatility if mostly not based on any weakening of economic numbers, but more to daily news and potential trade issues with China.

Finally, building permits and housing activity, including inventory numbers and pricing, are key indicators of a potential issue in the economy. The U.S. housing market is a complex and regional, even local market. One measure that is closely watched as a bellwether for any signs of weakening is the very hot New York City apartment market.

Manhattan home prices fell in the fourth quarter, with the median slipping to less than $1 million for the first time in three years, as ample inventory continued to allow buyers to demand sweeter deals. Condo and co-op prices declined to $999,000 in the three months through December, a drop of 5.8 percent from a year earlier, appraiser Miller Samuel Inc. and brokerage Douglas Elliman Real Estate said in a report Thursday.

Many apartments were sold for less than sellers originally sought, with an average discount of 6.2 percent from the last list price. That’s up from price cuts of 5.4 percent a year earlier. It was the first time the median was less than $1 million since the third quarter of 2015, when it was $998,000. Again, while not a clear signal of trouble, something to keep an eye on.

While the U.S. economy seems to be humming along at about a 2-3% growth rate, the length of the expansion, in historical terms, is cause for concern. There are key indicators to watch for any signs of possible recession. Keep a close eye.

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Scott Hansen is a vice president for Karpus Investment Management,Florida Office, a local independent, registered investment advisor managing assets for individuals, corporations, non-profits and trustees. Offices are located at 183 Sully’s Trail, Pittsford, NY 14534, phone (585) 586-4680.

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