Is The U.S. Economy Late In The Economic Cycle?

            recent article on MarketWatch based on a note by Torsten Slok, the chief economist at Deutsche Bank Securities caught my eye. The article argues that despite the fading fear of a recession and return to a normal yield curve, there are still indicators pointing to a late cycle economy and risks to the U.S. economy. 

The ten indicators are (1) growth in temporary worker staffing is falling at the fastest rate since the recession, (2) bank’s willingness to lend to consumers is falling and approaching zero, (3) delinquency rates on consumer loans are rising, (4) consumers have less appetite for buying large household goods, (5) consumers are much more optimistic today than about the future, (6) a gap is opening up between the Conference Board consumer confidence index and the University of Michigan consumer sentiment survey, (7) the difference between corporate confidence and consumer confidence is at a record high, (8) corporate profits as a share of GDP peaked in 2015, (9) the Fed’s Senior Loan Officer Survey shows credit conditions are tightening for corporates, and (10) the stock and share of corporate BBB debt outstanding is bigger than ever, which says credit spreads should be wider, but central bank money printing continues to push spreads tighter.

            Not all of these indicators are equally reliable from the perspective of predicting a recession. But a few stood out as being well correlated to past recessions or economic slowdowns. Some such as delinquency rates are no brainers. But there has been as much as a 4-year to 5-year lag time between the low in delinquency rates and the bottom in unemployment rates. Currently, the lag is only two years. Similarly, when a banks willingness to lend drops below zero and becomes negative it is often correlated with a recession. However, this is not a perfect indicator and it is not yet below zero. Other indicators are not perfect either. For example, CEO expectations minus consumer expectations are near a record low. But this indicator is seemingly not as strong as others in predicting a recession. The last indicator I highlight is corporate profits as a share of GDP is coming down. But with that said, it is still about 9.5% – 10% of GDP. In the last several recessions this value was roughly 7% of GDP. Hence, seemingly the U.S. economy is slowing but not yet in recession territory.

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