recession

Slow Burn

© Can Stock Photo Inc. / cafaphotos

We are now in the 7th year of economic expansion and recovery since the last recession. Many commentators insist that after such a long stretch, the next recession must surely be right around the corner. Of course, they’ve been insisting this for the past 7 years–remember the term “double dip”? The recovery didn’t make it a full year before people started predicting its demise, and now here we are seven years later.

Part of the longstanding skepticism surrounding this market cycle is grounded in the weak performance of this expansion. It’s been a long, slow recovery since the recession started in 2008. In a lot of people’s minds, those two things don’t go together. They think, “The recovery is going slowly, so it must not have enough fuel to keep going for very long.” There is a certain intuitive appeal to this way of thinking. We tend to see something moving quickly as having more momentum, so it would take longer to come to a stop.

The economy doesn’t really work in terms of “momentum”, though. Instead, market cycles tend to be driven by sentiment. In a normal expansion phase, optimism feeds into faster and faster growth, eventually creating a bubble. When the bubble finally pops at the height of its exuberance, values plummet and the economy is likely to plunge into recession.

You can think of it in terms of an out of control fire. The bigger it gets, the stronger it gets—but the faster it burns through its fuel. A raging conflagration will consume its fuel and die down to embers faster than a more contained fire.

In this analogy the current economic cycle has been a slow, cautious burn. The fire is burning away quietly but hasn’t really erupted into a general blaze—pessimism is widespread and we haven’t really seen the kind of manic stampede that marked the last days of the previous few expansions.

We never know how much fuel there is left for our “fire.” The expansion must eventually run itself down, but this may be a matter of months or days or years—we can’t be sure. However, we view the slow pace of recovery as an indicator that there may be a good bit of fuel yet untouched.

The opinions voiced in this material are for general information only and are not intended to provide specific advice or recommendations for any individual.

The economic forecasts set forth in the presentation may not develop as predicted and there can be no guarantee that strategies promoted will be successful.

The Next Recession is Coming… Again

chart from research.stlouisfed.org

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. The excesses that build up in good times lead to imbalances that get corrected by economic downturns.

The most notable feature of the current economic expansion is its slow, plodding pace. Most people with jobs or in business are familiar with one of the reasons for this: unprecedented expansion of the regulatory state. Our shop and many others in many lines are coping with new kinds of nonsense that hampers production or service. (We are not arguing for a Darwinian, regulation-free society, of course.)

The silver lining in our plodding economy is the lack of a boom in any major sector that could create a big downturn. New home construction has not really exceeded the sixty-year average. According to the National Auto Dealers Association, vehicle sales–while near a record–only replaced 1/15th of our vehicle fleet last year. It seems to us that the peak in auto sales lies ahead of us. Capital spending and business investment, which has at times gotten too inflated in the past, has remained extremely subdued.

Energy, of course, did boom—and then busted. But our diverse and dynamic economy has largely absorbed the job losses, and consumers and businesses are enjoying unforeseen low gasoline and energy prices. Corporate earnings have not been great, but should strengthen in the quarters ahead.

The Index of Leading Economic Indicators points to near-term trends in economic growth, and it has flashed a steady positive reading for years. The bond market speaks to us about economic conditions through the yield curve, which remains encouraging and positive. LPL Research publishes a Current Conditions Index which measures economic vitality right now—and it has remained in positive territory. LPL Chief Economist John Canally draws mostly comforting conclusions from the latest labor market statistics (ht.ly/v7Co3003MvP )

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. This is good news for investors.

The opinions voiced in this material are for general information only and are not intended to provide specific advice or recommendations for any individual. To determine which investment(s) may be appropriate for you, consult your financial advisor prior to investing. All performance referenced is historical and is no guarantee of future results. All indices are unmanaged and may not be invested into directly.

The Next Recession is Coming!

© Can Stock Photo Inc. / svanhorn

The next recession is always coming—and the next recovery, and so forth. Like the seasons and the tides, the economy runs in cycles. But after reviewing all the evidence, we don’t think it will arrive any time soon.

LPL Financial’s Research Department put together a useful summary on this issue. This is the short version, with other thoughts on the topic.

The first thing to understand is that two of the most popular fears about the cause of recessions are unfounded. The growth part of the cycle does not end because of old age. And the start of interest rate increases usually marks the midpoint, not the end, of the growth cycle.

So what are the causes of recession? LPL Financial believes that imbalances are the culprit. “In a healthy economy, there is a balance of responsible levels of borrowing, confidence, and spending.” So recessions are likely to occur after we see over-borrowing, over-spending, and overconfidence.

LPL Research has actually constructed numerical indicators to test for these three “overs” and calculated back through history. But it doesn’t take a rocket scientist to know that confidence is poor and spending has been weak. Borrowing has not gotten anywhere close to danger levels, either. Their conclusion is that the probability of a recession in the near future is unlikely.

The LPL “Over” Index agrees with another set of recession warnings we monitor, the Four Horsemen: home building, auto sales, business investment, and inventories. When one or more of these areas becomes overheated, trouble may ensue. All four are all at fairly subdued levels, or close to long term averages—not overheated.

There is one other indicator which may be both instructive and profitable. The price of raw materials usually peaks at around the same time the economy does, near the onset of recession. Crude oil, iron ore, copper and other natural resources tend to rise during expansions. But the prices for these goods have been falling for more than four years. We expect to see a sustained move up prior to the next recession.

We look at the facts and act accordingly, after considering all the pertinent information we can find. Our conclusion is that optimism is warranted. We will continue to follow our principles: search for bargains, “own the orchard for the fruit crop,” and avoid stampedes in the markets.

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.

The economic forecasts set forth in the presentation may not develop as predicted and there can be no guarantee that strategies promoted will be successful.

Investing involves risk including loss of principal.