Tag Archives: recession

How would a stock market crash affect us?

Summary: As so many of us expect, the US stock market might (might!) have begun the big rollover. If so, how might that affect the US economy? If you rely on the news, you’ll be surprised. Here’s a brief note; I’ll write more about this next week.  {2nd of 2 posts today.}

"Little Wonder" by Joe Maccer

Little Wonder” by Joe Maccer at DeviantArt.

The decline of stock prices in China and America will produce the usual flood of clickbait. In fact stock prices have only minor effects on the economy. In the 25 May 1970 issue of Newsweek, 3 major economists gave their views. Friedman and Samuelson are Nobel Laureates.

Henry Wallich: “After 1929, the Dow Jones industrial average dropped by about 90%. I see nothing of the sort ahead. And even if the stock market suffered further reverses, the economy still would not be decisively affected.”

Milton Friedman: “The stock crash in 1929 was a momentous event, but it did not produce the Great Depression and it was not a major factor in the Depression’s severity. A sharp but not unprecedented contraction was converted into a catastrophe by bad monetary policy — one that permitted the quantity of money to decline by one-third from 1929 to 1933. Whatever happens to the stock market, it cannot lead to a great depression unless it produces or is accompanied by a monetary collapse. And with present institutions and present understanding, that is well – nigh impossible.”

Paul A. Samuelson: “{R}emember, in our economy, the market is the tail — and the tail does not wag the dog, which is gross national product. The decline has cut a quarter of a trillion dollars from people’s net worth and that will be a depressant, but not a major one, on consumption and investment spending.”

Also see this analysis by the Boston Fed from June 1971: longer, same conclusion. Not much has changed since.

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Update about the economy: slowing, vulnerable, in a strange space.

Summary: Today we take another look at the US economy. The indicators paint a clear picture of an economy slowing, vulnerable to recession, in a strange space. A recession could become ugly; don’t expect a return to normality.  Overall it’s a boring picture, hence its widespread misrepresentation in the investment media as either wonderful or bleak (they give us the news we want).   {1st of 2 posts today.}



  1. The big trends
  2. My favorite indicator, a window onto the world
  3. Waiting for the return to normalcy
  4. For More Information

(1)  The Big Trends

The bears say that we’re in a recession. But then they so often say that, at least since the crash. Let’s look at the data. The picture shows bad news — for those earning their bread by telling you lurid stories about the economy. Let’s look at a typical graph: the percent change year-over-year in non-farm jobs, not seasonally adjusted (not needed, since we’re using YoY numbers).  It shows boring slow growth. The opposite of clickbait.

FRED: non-farm jobs YoY, NSA

The number of jobs provides too narrow a window on the labor market to tell us much. For a wider view we can turn to the Fed’s Labor Market Conditions Index, combining 19 indicators in a complex model. An exciting reading of -2, until you realize that zero is the average.  It shows slowing — as many indicators do now, but the data doesn’t justify the Zero Hedge headlines saying that we’re in recession.

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What does our surprisingly slow economy in Q1 tell us about the future?

Summary:  This week’s economic status report looks at the remarkable stability of the US economy since the crash, despite repeated slowdowns. Like the one that began in the first quarter. The second half might bring the long-awaited good news, or a recession. Boom or bust, either one will tell us much about the new economic regime that began at the turn of the century.  {1st of 2 posts today.}



The amazing aspect of the post-crash US economy is not the crashes so often predicted by the bears (which never arrived). It’s not the booms so often predicted by the bulls (which never arrived). It’s the stability of the slow but steady economic growth during the past 5 years — ranging from 1.2% to 3.1% (YoY real GDP, SA). The large quarter to quarter swings are fodder for economists’ excited predictions, but so far inertia rules.

YoY: year over year comparison. SA: seasonally adjusted. SAAR: SA at annualized rate.


This stability is deceptive, as economic data so often is. The periods of slow growth, with high risk of becoming recessions, were met by fiscal or monetary stimulus. The boomlets faded away for various causes. While it looks like stability, it was actually a series of unfortunate events plus active economic management by the government.

Here we are again

Q1 real GDP was almost zero (0.2% SAAR). That’s ugly, especially since the consensus forecast was 3.2% a year ago and 1% the day before (although the forecast by the Atlanta Fed’s GDPnow model was spot-on at 0.1% — raising the prospect of mass unemployment of economists as models improve). Worse, Q1 GDP was boosted by a large inventory build (GDP measures production, not sales). GDP less that inventory build was -0.5% SAAR. Those stockpiles will depress Q2 growth. Not to worry, since most economists are excited about the second half of the year (as always).

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Today’s forecast for the US economy & stock market: cooling, perhaps with storms.

Summary: Today we have another briefing on the US economy and stock market. The situation grows darker, cliffs might lie ahead, but it’s still too soon to say more than that. Read on to learn the details.  {1st of 2 posts today.}


This is a new economic regime, profoundly different than the post-WWII era. Many of the relationships we used to navigate by have changed, as things considered extraordinary have become normal (e.g., long periods of zero interest rates and even negative rates). Yet there are warning signs with a long history of accuracy.

Don’t be comforted by economists’ optimism; many studies have shown their unreliability (especially their inability to foresee recessions). Listen instead to the 30 central banks that have cut interest rates this year, showing their true view of the situation.

For clear advice I recommend reading Albert Edwards of Société Générale, among the most insightful of investment strategists. In this from his 12 February report he gives the essential facts about our situation:

The market seems pretty convinced that the Fed will tighten in the middle of this year and maybe it will. Certainly the labour market is tighter and the Fed tells us that the recovery is well established. But, the Fed always spins a bullish yarn. Their track record of over-optimism is only surpassed by the appalling record of private sector forecasters – most especially in forecasting recessions. A rate hike this year when deflation pressures are intensifying could go down as big a policy cock-up as the BoJ raising VAT {valued-added taxes} in 1997, triggering recession, or the ECB tightening rates in July 2008 when the global recession was already well underway!

His report on 26 February updates that with the missing part of the equation: bad news. US economic data has grown worse since he wrote this.

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Economics gets interesting as the economy darkens while stocks bubble

Summary: These economic status reports grow more interesting as the data shows slowing while the stock market bubbles. It’s nothing like 2007, except in our blindness to events and disinterest in preparing for obvious risks. When the recession arrives (we can’t know when), I believe it will mark the start of a new economic order. The next generation will listen with astonishment to tales of these days.  {2nd of 2 posts today.}

“In a nutshell: Things are looking better — in fact, they’re looking downright good. The economy is showing solid momentum and there’s good news in virtually every sector. I expect U.S. growth to be about 2½% in real GDP. I see the continued improvements in the economy pushing wages and prices up, and inflation moving back toward its target.  I expect to reach full employment by the end of the year.”

John C. Williams (President of the San Francisco
 Fed), 23 March 2015. Be very afraid when you hear such things while the indicators tumble.



  1. One of the big indicators: new orders durable goods.
  2. GDP on recession watch.
  3. Stocks: bubbling again because we don’t learn.
  4. A bear market will wreck the investment biz.
  5. For More Information.

(1)  One of the big indicators: new orders for durable goods

The February numbers were weak, as they have been so often during this long slow expansion. The big picture is that they have been flat during the past 2 years (easily missed if you read the news by the hyperventilating over the little swings). They’re the same level as September 2006, and 5% below the pre-crash peak of December 2007. Almost unchanged from a year ago, any breakdown from here will warn of an imminent recession.

New Orders for Durable Goods: February 2015

(2)  GDP on recession watch

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Updating the recession watch; & what might the government do to fight a slowdown?

Summary: The economic data continues to darken. Let’s review the situation — updating the recession watch — and guessing what might be the government’s response to a recession. It’s an era of new normals, so we should expect steps that would have been considered incredible or even mad a decade or two ago.  {1st of 2 posts today.}

“Toto, I’ve a feeling we’re not in Kansas any more. We must be over the rainbow!”
— Dorothy in “The Wizard of Oz”.



  1. The bad news
  2. Worse news
  3. The weak data
  4. What comes next?
  5. For More Information
  6. Perhaps a better world lies ahead

(1)  The bad news

The graph below gives an ugly forecast. But let’s keep this in context, especially now that the doomsters have discovered it. The value of the Atlanta Fed’s GDPnow forecast is its immediacy. They explain that it’s no more accurate than forecasts by economists or other models. Which is to say it’s a best guess made with limited information. Also, the Fed remains hopeful that Q1 is an aberration, so that 2015 has growth of 2.3% – 2.7%.

20150317 GDPnow forecast

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How close are we to the next recession?

Summary: How close is the US economy to a recession? Here we review the evidence and draw a firm conclusion. {1st of 2 posts today.}

The financial press overflows with confident forecasts about everything from individual stock prices to the fate of the overall economy. It’s usually difficult to reliably predict such things with useful accuracy; since the crash it’s become far more so. My prediction each year since 2010 has been for slow growth (in the low 2%’s); that’s proven correct. Let’s try for something more ambitious.



  1. How close are we to a recession?
  2. The Econbrowser Recession Indicator Index.
  3. Looking at Q1 GDP.
  4. How fast can GDP fall?
  5. The current numbers: how are we doing?
  6. Conclusions
  7. For More Information

(1)  How close are we to a recession?

Let’s start with the big picture and move to the details. GDP was moderately strong in Q3 and Q4 at aprox 2.6%. Economists expect a strong economy (as usual). Looks good.

But some (not all) indicators show slowing. That’s sparked excitement from the bears, like this from Zero Hedge: Two More Harbingers Of Financial Doom That Mirror The Crisis Of 2008.

But before examining the data, we need some context. Surveys of consensus opinion of economists have never predicted a recession (correctly or incorrectly). So their sunny forecasts tell us little.

Second, the economy has experienced unprecedented distortion from six years of fiscal and monetary stimulus — including maintaining the short-term risk-less interest rate at zero, long-term government bond yields below the inflation rate (aka negative real rates), plus three rounds of quantitative easing. These have made many of the usual forecasting tools less effective.

(2)  The Econbrowser Recession Indicator Index.

For useful perspective see a tool developed by James Hamilton, Professor of Economics at UC-San Diego. His Econbrowser Recession Indicator Index is an indicator of contemporaneous data — its quarterly indexes are not changed as data is revised. See his article describing it. It now reads 1.6% — low odds of a recession, slowly falling.

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