Tag Archives: recession

Recession Watch: the economic indicators that show what’s coming

Summary: As the expansion ages and growth slows, we should begin to watch for signs that the next recession approaches. Here are some tips for doing so without spending much time at it — avoiding the complacency of Wall Street’s economists and the exaggerated darkness of the popular permabears (such as Zero Hedge). {2nd of 2 posts today.}


What should we watch among the blizzard of economic data? Journalists tend to focus on the numbers most frequently reported, usually about manufacturing and housing. Such as this week’s existing home sales volume (oddly, we don’t similarly obsess over NYSE volume). It’s important for people in that biz, but tells us little about the US economy.

Also big in the news are new home sales, building permits, mortgage applications, and many other housing datapoints. For a simple measure of this industry see total residential construction spending. It shows a continued strong expansion. Tune in next month to see if anything has changed.

Residential Construction Spending

What are the most important economic numbers?

But the often dramatic graphs don’t tell us the importance of those numbers. Here’s one perspective on the big picture…

  • Construction value added: 4% of GDP (housing is 1/3 of this).
  • Goods-producing value added: 19% of GDP (manufacturing is 12% of this).
  • Services value added: 68% of GDP.

Another way to see this relationship: manufacturing new orders were 15% of GDP in 1995; now they’re only 10%. Manufacturers employed 30% of all non-farm workers in 1955; they employ only 9% today. Manufacturing was once the key swing sector of the economy; now we are a services economy. Unfortunately there are few good leading indicators for the service sector. Creating Purchasing Managers Indexes for Services was a creative idea, but untested — and doesn’t make much sense to me: what do they PM’s of service corps do that gives them special insight about the economy?

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Recession Watch: Falling Commodity Prices to Hurt America

Economic indicators are like biosigns of a living organism. They signal changes in complex systems that we cannot directly say and don’t well understand. The top rule is that rapid change in key indicators shows destabilizing forces at work, despite the complacency with which they’re usually seen by economists.

We see this in the on-going collapse of commodity prices. This has beneficial effects on America, but signals rising global stress — both political and economic — that might bite us hard. See my analysis of this at Wolf Street…

Recession Watch: Falling Commodity Prices to Hurt America

A leading indicator of trade, economic growth, and geopolitical instability

A hard landing for the Hindenburg

Recession Watch: a turning Point in Unemployment Claims?

A new era has begun for the US and global economy, trashing the simple rules of the post-WWII era. Instead of the business cycle (the “clock” analogy found in textbooks), we have secular stagnation interrupted by frequent bubbles alternating with bouts of debt deflation that are fought by massive government stimulus programs.

Since we have no playbook for this new economic regime, investors must watch the data. Bulls look at signs of strength; bears focus on signs of weakness. Survivors look at broad indicators, showing the net effect of the many cross-currents affecting the economy. The number of new claims for unemployment is among the best: close to real-time (weekly), hard data, and a leading indicator.

New unemployment Claims: YoY in 2015

See the analysis at Wolf Street. Second of 2 posts today.

The Fed’s Vice Chairman warns about us about the strong dollar

Stanley Fischer (Vice Chairman of the Fed) gave us a warning in a speech on Nov 12. He’s someone we should list to.

Effect of rising US dollar on trade.

He reported that since July 2014 the US dollar has risen aprox 15% vs the currencies of our major trading partners, a “large, though not unprecedented” move. The Fed’s econometric model show that a 10% dollar rise reduces exports by 3% after one year and 7%+ after three years — and increases real imports by 4% after three years. The net effect on GDP: a decline of 0.7% after one year and 1.5% after three years (these numbers are roughly estimates). The bottom line…

Read my full report at Wolf Street.

What Will the US Do in a Recession? Look to Japan for Answers…

Summary: In a previous article I listed the powerful tools the US government would deploy during the next recession. Today we discuss something more important: will they work? We can look to Japan for an answer. Their great stagnation began with the 1989 crash, 11 years before the tech bubble burst and began America’s new era. Japan took fiscal and monetary policy to the outer limits. Now it’s in a recession. Although our circumstances differ, we’re following in their tracks.

Keiki Kaifuku, Kono Michi Shika Nai” (“Economic Recovery,
There Is No Road But This”).
— LDP Campaign Slogan, December 2014. If only this were true.

Japan: setting sun

Is that a setting sun, or a rising sun?

As Richard Koo predicted, during the Great Recession America repeated Japan’s mistakes during its “lost decade”. That’s the bad news. The good news is that America climbed into a slow recovery after the worst downturn since the 1930s. The worse news is that another recession lies ahead. Potentially a bad one, with both the world economy and many domestic sectors weak. The government will deploy powerful tools to fight this downturn. How well will they work? Look to Japan for answers…

Read the rest at Wolf Street.

What will cause the next US recession?

Summary:  It’s been six years from the previous recession. We should be watching for the next downturn. Since the usual forecasting tools never worked well, and are probably even less reliable in this new century, what should we watch? I suggest looking at potential causes of the next recession. There are a few obvious candidates. See their story in my post at Wolf Street.



  1. Reasons for economists’ confidence
  2. Bubbleville in Northern California
  3. Bigger:  Automobiles
  4. Bigger: Housing
  5. Biggest: Exports
  6. Conclusions

See the article at Wolf Street.

The Fed will use these power tools during the next big recession

Summary: Six years after the recession ended, we are due for another recession. Many experts say that the government is “out of bullets” to fight the next severe downturn. That’s quite false because 2008 marked the start of a new era in which our leaders manage the business cycles using strange and awesome tools. We’ll learn the long-term effects of these tools slowly, probably only decades later.  {2nd of 2 posts today.}

“All is not lost until you run out of airspeed, altitude, and ideas.”
— Pilots’ wisdom.


Roger Bart and Shuler Hensley (on table) in the musical “Young Frankenstein” at the Hilton Theater.

(1) Expect the next recession

Free market economic systems produce greater growth than any other system yet tried. Business cycles — and recessions — are a price we pay for the growth. They’re unpredictable — literally so (the consensus of economists has never predicted one). They can destroy years of growth, and change the course of nations. The 2008 crash did both, as shown by this slide from a typically excellent analysis by Brad DeLong.

See the full post at Wolf Street!