The Next Recession is Coming, pt 2

© Can Stock Photo Inc. / albund

Regular readers will recognize this headline. The next recession is always coming. Human nature being what it is, the economy will always have cycles just as the world will always have seasons. We humans are great at this: taking a good thing too far. The excesses that build up in good times lead to imbalances that get corrected by economic downturns.

Because investment trends are based loosely on what is going on in the real economy, it makes sense to think about where we might be in the economic cycle. So from time to time we report to you the state of the economy as we see it, with an eye on that next recession. Hat tip to LPL Research, people who do a lot of work on topics we need to know about.

In his latest report, LPL’s chief economist John Canally looked at the current fears in the marketplace and compared them to the groundhog. Many people pay attention to the groundhog, but he actually isn’t worth a darn at weather forecasting. Likewise with the drop in the price of oil, the rise of the dollar, some shrinkage in one sector of the economy—people are paying attention, but these things are not good at forecasting recessions.

Canally also compares the current situation to the 2007 economic and market peak and how things look for consumers. The savings rate is more than double, the mortgage rate is better by a third, household debt is a lower percentage of income and falling, and gasoline prices are….well, you know. Bottom line, we’re in pretty good shape.

Did you know the bond market provides a recession forecast that has worked very well since 1950? The bond market speaks through the yield curve, a simple measure of whether shorter term rates are higher or lower than longer term rates. When short term interest rates get above long term rates, there has always been trouble ahead. LPL’s Anthony Valeri just released a study concluding that the yield curve is not indicating recession.

We’ve never had a recession in recent history that was marked by strong jobs growth. And here we are, with a record 64 straight months of jobs growth. Nor has a drop (or a crash) in the price of oil ever precipitated a recession. The oil price drop is a mixed bag: the energy industry has been hit hard with job losses and reduced corporate earnings. But the losses to energy are gains to the rest of us.

So yes, the next recession IS coming. We just do not think it will arrive soon. Our plodding plow-horse recovery continues, no boom—but no bust either.

The opinions voiced in this material are for general information only and are not intended to provide specific advice or recommendations for any individual. All performance referenced is historical and is no guarantee of future results.

Bonds are subject to market and interest rate risk if sold prior to maturity. Bond values will decline as interest rates rise and bonds are subject to availability and change in price.