Vehicle Sales, ISM Manufacturing Point To Continuing Expansion

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By New Deal Democrat

The current economic environment is not straightforward from the viewpoint of the business cycle. My best summary is:

  • There is no recession in sight, BUT
  • We are in a generally decelerating later part of the expansion, BUT
  • The shallow mid-cycle industrial recession looks increasingly likely to have bottomed in March.

Tuesday's surprisingly strong July vehicle sales report, at 17.88 million annualized, is potent evidence that the US consumer is continuing to buy this important durable good:

(graph courtesy: Calculated Risk)

Put that together with the strong new home sales report for June, which set a post-recession record, and the big Brexit-related decline in mortgage rates (which make home-buying easier), and there really is no near-term recession risk out there.

BUT, Q2 GDP did show a slight downturn in real private residential investment:

This is a long leading indicator, which on average turns down 5 quarters before the next recession. Of course, the Q2 softness may or may not be a blip.

More concerning is the continuing tightening of loan requirements, as shown from the Q2 report of credit managers released last week:

This isn't at recessionary levels yet, but any value above 0 shows more banks tightening than not. The tightening trend is certainly intact, suggesting that the financial conditions bringing about a recession are gradually falling into place.

As I pointed out in last Saturday's "Weekly Indicators" column, the TED spread and LIBOR have both now crossed the .50 threshold that has typically been in place on the way to recessions before:

And the YoY deceleration in real GDP certainly isn't encouraging:

BUT Monday's ISM report, and particularly the leading new orders component, continued to show decent expansion:

(h/t Haver Analytics)

The average of regional Fed reports also is improving if not yet positive:

while the average of the "new orders" components of those reports (not shown in the graph) has turned positive.

And the big reason for the GDP downdraft was the liquidation of inventories. As I have often pointed out, inventories continue to decline after a recession (or a mid-cycle correction) end:

That orders and sales are picking up, while inventories have been liquidated, is more evidence that the shallow industrial recession brought about by the 2014-15 surge in the US$ has ended.

New Deal Democrat,