September 3, 2019 glacierinvest

Economists have predicted nine of the past five recessions. If that statement doesn’t make sense to you or appears to be wrong, it’s meant to. The quote is attributed to Paul Samuelson, the first American to win the Nobel Prize in economics. The quip was meant to imply that economists aren’t very good at predicting recessions. Yet, they still attempt to predict recessions along with a whole other cadre of “experts”.

Recession speculation has picked up steam over the past 18 months as the current economic cycle gets longer and longer in the tooth and as tariffs have become a reality. Additionally, as the yield curve has inverted (short-term interest rates are higher than longer-term interest rates), warnings of an eventual recession have abounded. There’s usually a lag time between yield curve inversion and the eventual recession. Additionally, the yield curve inversion may not be entirely attributable to the US economy slowing down. With negative interest rates prevalent throughout the rest of the world, demand for positive yielding bonds is presumably high. Such demand could push longer-term interest rates down, causing them to drop below short-term rates (invert). Irrespective of yield curve inversions this year, there will obviously be another recession but nobody knows exactly when that will be. We could be in a recession right now or we might not experience a recession for another few years.

I’m not convinced

I’m not an economist but I do actively monitor the economy and financial markets by virtue of my profession. I may be oversimplifying things but here’s why I believe a recession might not be imminent.

The consumer still makes up the majority (>2/3) of the US economy. Retail sales growth has been solid in 2019 and isn’t really showing signs of slowing down.

US Retail Sales YoY Growth

Furthermore, retail sales growth has decisively turned negative before each of the past two recessions. We did experience a negative print in December 2018 on the heels of the stock market decline during 4Q18 but then sales growth picked up again in January. We also experienced a negative growth print in January 2014 only for growth to pick up again in subsequent months.

US Retail Sales YoY Growth (recessions shaded in gray)

Industrial production on the other hand has been noticeably slowing but continues to grow at a positive rate year-over year (barely). Industrial production doesn’t make up nearly as much of the economy as the consumer does but could be a reflection of certain business’ expectations for consumer demand. The slowing trend may also be a result of tariff impacts both current and expected in the future.

US Industrial Production YoY Growth

The next chart is the one that appears to have spooked many market observers. It measures manufacturing expectations for the economy. Any level below 50 is considered to be contractionary while any level above 50 is considered to be expansionary. The latest reading was revised up from just below 50 (49.9) to 50.3. Regardless, the trend is definitively pointing down. However, manufacturing is a very small piece of the overall economic pie.

US Manufacturing PMI

Services expectations for the economy, on the other hand, are a more meaningful component of the economy. The trend in this index is also noticeably down but the most recent reading was still well into expansionary territory.

US Services PMI


There’s no denying the US Economy is slowing along with the rest of the global economy. Another recession is a reality but the timing is uncertain. There are a lot of smart people that continue to talk about and try to handicap its eventual arrival. While I’m not an economist, I do not believe a recession in the US is imminent before the end of the year. The timing of the recession actually isn’t all that important if you have a well-thought aout and designed investment plan and stick to it. That’s what matters the most.