Madame Chair Please Note: There Is Something Brewing On The Horizon

by: Steve Picarillo


US economic growth is slowing, suggesting that the US is at risk of slipping into recession.

Recessions typically occur every seven to 10 years. Although external or shock events may alter the normal pattern, nonetheless, the timing for a recession is right.

While the severe weather that blanketed much of the US was certainly a driver behind the drop in certain activity, there are more deep-rooted economic causes.

While the US economy continues to grow, the rate of growth is slowing. This troubling trend suggests that the US economy is, once again, at risk of slipping into recession. This should not be a surprise given the historic patterns of economic cycles, the overall weakness blanketing much of the global economies and the escalating political conflicts abroad. Raising rates in six months time, may not be necessary.

When it comes to forecasts about the US economy, there is surely no shortage of naysayers, this humble correspondent included. While predictions of recession and economic doom and gloom may be viewed something akin to Paul Revere's famous midnight ride on April 18, 1775 crying the "British are coming", nonetheless, a recession is coming.

The very word "recession" seems to put investors and the general public into panic mode (certainly the media shifts into hyperbole headline mode). This type of reaction is understandable, as the consequences of the 2007-2009 recession are still fresh in mind. The mere thought of living through another economic downturn is simply too distressing for some to endure. As such, a looming recession is a dose of unwelcome and discouraging news for many. On a positive note though, absent an unexpected external event (i.e. non-economic), any recession is likely not to hit until late 2014 or early 2015. Given this potential timeframe, overreacting at this time, whether it be by investors or policy makers, may not be necessary however some mid-term strategic tweaking may be necessary.

A quick primer: The characteristics of a recession include a general slowdown in economic activity, a decline in business activity, a reduction in the amount of goods and services produced and sold. According to the National Bureau of Economic Research (the official authority of US recessions), there were 10 recessions between 1948 and 2011. The most recent recession began in December 2007 and ended in June 2009.

When looking back on business cycles since the Great Depression, a clear pattern emerges. Recessions typically occur every seven to 10 years. Although events, such as the 9/11 attacks or a shock to oil prices, as seen in the 1970s, can disrupt the "normal" business cycle. Given the timing in the cycle, by looking at the calendar alone, a logical conclusion could be that the US is approaching another recession.

Chart 1-

Chart 1

Since the end of the 2007 recession, the US economy has been on a roller coaster of highs and lows. The recovery has been tepid and, at times, tottering, fraught with starts and fits. The volatility of the GDP and the common pattern of decline prior to, and, of course, during a recession, are clear and rather repetitive.

Chart 2

Chart 2

Over the past year, growth of the "Leading Index" has been within the normal trend of this weak and lackluster recovery, however more recent data points negative, which causes pause. Importantly however, the weakness in the trend is not significant enough to predict a recession in the near-term. Accordingly, this data point suggests any recession is likely to be more than six month away.

That said, there is significant data suggesting that there are clouds are on the horizon. Focusing on the growth of consumer spending to income. As Chart-3 demonstrates, consumers continue to spend, but they are spending less in relation to income. This may indicate that consumers are concerned about the security of their jobs and income, the overall economic environment and/or the value of their home- just to name a few.

Chart 3-

Another troubling trend is the trajectory and intensity of the downward trend of personal spending to income, after the year-end spike. While the severe weather that blanketed much of the US was certainly a driver behind this sudden drop, there are likely more deep-rooted economic causes. Moreover, a considerable amount of this spending will not be recouped, as such; this suggests lost dollars that will never flow through the economy. This trend will be most telling as it unfolds in the coming months.

One of the most widely recognized indicators of a recession is an increase in the unemployment rates. While employment data is useful in charting the depth of a recession, unemployment is less useful in predicting recessions, as it tends to peak well after the recession is over.

While civilian unemployment is considered a lagging indicator, the truck transportation and warehouse portion of employment, Chart-4, provides insight in forecasting impending recessions. Given the need for people to buy food and goods, transportation activity can be used as an economic indicator, given goods need to be moved well before the final retail sale occurs. Slowing employment in this sector suggest less goods are being shipped, indicating reduced demand for inventory, and, as such, a slower business environment.

Chart 4

Transportation employment growth remains above the zero growth line, but the growth is decelerating and is approaching negative territory. This measurement of employment provided a six-month warning of an impending recession for the past two recessions. Given this, the trajectory of the transportation index suggests a recession may very well be on the horizon, however more than six months away.

There are also numerous external factors such as the economic weakness in the Eurozone, the slowing economy in China, the Russian conflict, the unsettled Middle East and the constant threat of terrorism, all of which can impact the timing of the next recession. By their nature, these events are difficult, if not impossible, to predict and it is extremely difficult to fully estimate the overall impact of any such factor(s) on the economic environment in the US or across the globe.

The above are just a few signposts used to predict economic trends. There are countless others measures and indicators that may tell the same story or something totally different. The most certain prediction that one can make is that the next nine to 12 months will likely be more of the same- anemic economic growth, low levels of employment, highs and lows in certin key data and general apprehension. In six months time, a rise in interest rates may not be warranted.

After all the numbers are crunched, massaged, charted and presented, it may just fall back to historic trends, which tells us that recessions typically transpire every seven to 10 years, so the calendar suggest we are getting close. So, time to tell.

Disclosure: I have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours. I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.