by Calculated Risk on 1/16/2018 01:59:00 PM

CR January 2018 Update: In 2013, I wrote a post "Predicting the Next Recession". I repeated the post in January 2015 (and in the summer of 2015, in January 2016, in August 2016, and in April 2017) because of all the recession calls. In late 2015, the recession callers were out in force - arguing the problems in China, combined with the impact on oil producers of lower oil prices (and defaults by energy companies) - would lead to a global recession and drag the US into recession.  I didn't think so - and I was correct.

I've added a few updates in italics by year.  Most of the text is from January 2013.

A few thoughts on the "next recession" ... Forecasters generally have a terrible record at predicting recessions. There are many reasons for this poor performance. In 1987, economist Victor Zarnowitz wrote in "The Record and Improvability of Economic Forecasting" that there was too much reliance on trends, and he also noted that predictive failure was also due to forecasters' incentives. Zarnowitz wrote: "predicting a general downturn is always unpopular and predicting it prematurely—ahead of others—may prove quite costly to the forecaster and his customers".

Incentives motivate Wall Street economic forecasters to always be optimistic about the future (just like stock analysts). Of course, for the media and bloggers, there is an incentive to always be bearish, because bad news drives traffic (hence the prevalence of yellow journalism).

In addition to paying attention to incentives, we also have to be careful not to rely "heavily on the persistence of trends". One of the reasons I focus on residential investment (especially housing starts and new home sales) is residential investment is very cyclical and is frequently the best leading indicator for the economy. UCLA's Ed Leamer went so far as to argue that: "Housing IS the Business Cycle". Usually residential investment leads the economy both into and out of recessions. The most recent recovery was an exception, but it was fairly easy to predict a sluggish recovery without a contribution from housing.

Since I started this blog in January 2005, I've been pretty lucky on calling the business cycle.  I argued no recession in 2005 and 2006, then at the beginning of 2007 I predicted a recession would start that year (made it by one month with the Great Recession starting in December 2007).  And in 2009, I argued the economy had bottomed and we'd see sluggish growth.

Finally, over the last 18 months, a number of forecasters (mostly online) have argued a recession was imminent.  I responded that I wasn't even on "recession watch", primarily because I thought residential investment was bottoming.

[CR 2015 Update: this was written two years ago - I'm not sure if those calling for a recession then have acknowledged their incorrect forecasts and / or changed theirs views (like ECRI and various bloggers). Clearly they were wrong.]

[CR April 2017 Update: Now it has been over four years!  And yes, ECRI has admitted their recession calls were incorrect.  Not sure about the rest of the recession callers.]

[CR January 2018 Update: Now it has been five years!]

Now one of my blogging goals is to see if I can get lucky again and call the next recession correctly.  Right now I'm pretty optimistic (see: The Future's so Bright ...) and I expect a pickup in growth over the next few years (2013 will be sluggish with all the austerity).

The next recession will probably be caused by one of the following (from least likely to most likely):

3) An exogenous event such as a pandemic, significant military conflict, disruption of energy supplies for any reason, a major natural disaster (meteor strike, super volcano, etc), and a number of other low probability reasons. All of these events are possible, but they are unpredictable, and the probabilities are low that they will happen in the next few years or even decades.

[CR 2016 Update: The recent recession calls are mostly based on exogenous events: the problems in China and in commodity based economies (especially oil based).  There will be some spillover to the US such as fewer exports (and an impact on oil producing regions in the US), but unless there is a related financial crisis, I think the spillover will be insufficient to cause a recession in the US.]

2) Significant policy error. This might involve premature or too rapid fiscal or monetary tightening (like the US in 1937 or eurozone in 2012).  Two examples: not reaching a fiscal agreement and going off the "fiscal cliff" probably would have led to a recession, and Congress refusing to "pay the bills" would have been a policy error that would have taken the economy into recession.  Both are off the table now, but there remains some risk of future policy errors. 

Note: Usually the optimal path for reducing the deficit means avoiding a recession since a recession pushes up the deficit as revenues decline and automatic spending (unemployment insurance, etc) increases.  So usually one of the goals for fiscal policymakers is to avoid taking the economy into recession. Too much austerity too quickly is self defeating.

[CR 2017 Update: Austerity was a mistake (obvious at the time).  And it is possible that we will see serious policy mistakes from the new administration (a complete wildcard).  And it is possible the Fed could tighten too quickly. ]

1) Most of the post-WWII recessions were caused by the Fed tightening monetary policy to slow inflation. I think this is the most likely cause of the next recession. Usually, when inflation starts to become a concern, the Fed tries to engineer a "soft landing", and frequently the result is a recession. Since inflation is not an immediate concern, the Fed will probably stay accommodative for a few more years.

So right now I expect further growth for the next few years (all the austerity in 2013 concerns me, especially over the next couple of quarters as people adjust to higher payroll taxes, but I think we will avoid contraction). [CR 2015 Update: We avoided contraction in 2013!] I think the most likely cause of the next recession will be Fed tightening to combat inflation sometime in the future - and residential investment (housing starts, new home sales) will probably turn down well in advance of the recession. In other words, I expect the next recession to be a more normal economic downturn - and I don't expect a recession for a few years.

[CR January 2018 Update: This was written in 2013 - and my prediction for no "recession for a few years" was correct.  This still seems correct today, so no recession in the immediate future (not in 2018). ]

by Calculated Risk on 1/16/2018 10:39:00 AM

The advance estimate of Q4 GDP will be released on Friday, January 26th.

Here are a few estimates, from Merrill Lynch:

The strength of the retail sales report [last Friday] lifted our 4Q GDP tracking estimate by 0.6pp to 2.8% qoq saar.
emphasis added

From the Altanta Fed: GDPNow

The GDPNow model forecast for real GDP growth (seasonally adjusted annual rate) in the fourth quarter of 2017 is 3.3 percent on January 12, up from 2.8 percent on January 10.

From the NY Fed Nowcasting Report

The New York Fed Staff Nowcast stands at 3.9% for 2017:Q4 and 3.2% for 2018:Q1.

CR Note: It looks likely that GDP will be close or over 3% again in Q4.

by Calculated Risk on 1/16/2018 08:38:00 AM

From the NY Fed: Empire State Manufacturing Survey

Manufacturing firms in New York State reported that business activity continued to expand strongly. The general business conditions index was little changed at 17.7. ... The index for number of employees fell nineteen points to 3.8, a level suggesting only a small increase in employment levels. The average workweek index fell to a level near zero, indicating that hours worked were unchanged.

Looking ahead, firms remained optimistic about the six-month outlook. The index for future business conditions edged up two points to 48.6. The index for future inventories rose to 20.3, a record high, indicating that firms expect to build up inventories significantly in the months ahead. The index for future number of employees rose three points to 26.9, a multiyear high.
emphasis added

This was slightly below expectations, but still a solid report.

by Calculated Risk on 1/15/2018 06:34:00 PM

Weekend:
• Schedule for Week of Jan 14, 2018

Tuesday:
• At 8:30 AM ET: The New York Fed Empire State manufacturing survey for January. The consensus is for a reading of 18.6, up from 18.0.

From CNBC: Pre-Market Data and Bloomberg futures: S&P 500 are up 7, and DOW futures are up 160 (fair value).

Oil prices were up over the last week with WTI futures at $64.73 per barrel and Brent at $70.26 per barrel.  A year ago, WTI was at $52, and Brent was at $54 - so oil prices are up solidly year-over-year.

Here is a graph from Gasbuddy.com for nationwide gasoline prices. Nationally prices are at $2.54 per gallon. A year ago prices were at $2.34 per gallon - so gasoline prices are up 20 cents per gallon year-over-year.

by Calculated Risk on 1/15/2018 10:46:00 AM

A few excerpts from a note by Goldman Sachs economists:

• We expect strong global growth this year, given firm current momentum, easing financial conditions, and supportive fiscal policy. But high asset valuations and the prospect of labor market overheating suggest that the recent strength might be “too much of a good thing” further down the road.
...
• Our model suggests that near-term recession risk is low. The probability of a downturn is also below normal over the next 2-3 years, but has been rising steadily in economies that are seeing unusually easy financial conditions and tightening labor markets. These include the US, Germany, the UK and a number of smaller G10 economies ...

• Although our model is subject to a number of caveats, it confirms that we need to worry little about recession risk this year. But our analysis suggests that we should pay attention to measures of imbalances that signal rising recession risk further down the road.

CR Note: My view is recession risk is low this year, and I expect further growth in the US in 2018.

by Calculated Risk on 1/14/2018 08:09:00 AM

In 2017, eight FDIC insured banks failed. This was up from 5 in 2016.

The great recession / housing bust / financial crisis related failures are behind us.

The first graph shows the number of bank failures per year since the FDIC was founded in 1933.

Click on graph for larger image.

Typically about 7 banks fail per year, so the 8 failures in 2017 was close to normal.

Note: There were a large number of failures in the '80s and early '90s. Many of these failures were related to loose lending, especially for commercial real estate.  Also, a large number of the failures in the '80s and '90s were in Texas with loose regulation.

Even though there were more failures in the '80s and early '90s then during the recent crisis, the recent financial crisis was much worse (larger banks failed and were bailed out).

The second graph includes pre-FDIC failures. In a typical year - before the Depression - 500 banks would fail and the depositors would lose a large portion of their savings.

Then, during the Depression, thousands of banks failed. Note that the S&L crisis and recent financial crisis look small on this graph.

by Calculated Risk on 1/13/2018 08:11:00 AM

The key economic report this week is December Housing Starts.

For manufacturing, December industrial production, and the January New York, and Philly Fed manufacturing surveys, will be released this week.

----- Monday, Jan 15th -----
All US markets will be closed in observance of Martin Luther King Jr. Day

----- Tuesday, Jan 16th-----
8:30 AM ET: The New York Fed Empire State manufacturing survey for January. The consensus is for a reading of 18.6, up from 18.0.

----- Wednesday, Jan 17th -----
7:00 AM ET: The Mortgage Bankers Association (MBA) will release the results for the mortgage purchase applications index.

9:15 AM: The Fed will release Industrial Production and Capacity Utilization for December.

This graph shows industrial production since 1967.

The consensus is for a 0.4% increase in Industrial Production, and for Capacity Utilization to increase to 77.3%.

10:00 AM: The January NAHB homebuilder survey. The consensus is for a reading of  73, down from 74 in December. Any number above 50 indicates that more builders view sales conditions as good than poor.

2:00 PM: the Federal Reserve Beige Book, an informal review by the Federal Reserve Banks of current economic conditions in their Districts.

----- Thursday, Jan 18th -----
8:30 AM ET: The initial weekly unemployment claims report will be released.  The consensus is for 250 thousand initial claims, up from 261 thousand the previous week.

8:30 AM: Housing Starts for December.

This graph shows single and total housing starts since 1968.

The consensus is for 1.280 million SAAR, down from 1.297 million SAAR in November.

8:30 AM: the Philly Fed manufacturing survey for January. The consensus is for a reading of 25.0, down from 26.2.

----- Friday, Jan 19th -----
10:00 AM: University of Michigan's Consumer sentiment index (Preliminary for January). The consensus is for a reading of 97.0, up from 95.9.

by Calculated Risk on 1/12/2018 02:48:00 PM

A few comments from Steven Kopits of Princeton Energy Advisors LLC on Jan 12, 2017:

• Total US oil rigs were up 10 to 752 this week

• Horizontal oil rigs were up 4 to 654

• We have expected rig counts to rise sharply in recent weeks, and we saw some – but still insufficient – vindication this week.
...
• Incredible price action again this week, with WTI breaching the $64 threshold, but with the Brent spread falling below $6.00.

Click on graph for larger image.

CR note: This graph shows the US horizontal rig count by basin.

Graph and comments Courtesy of Steven Kopits of Princeton Energy Advisors LLC.

by Calculated Risk on 1/12/2018 11:16:00 AM

The Cleveland Fed released the median CPI and the trimmed-mean CPI this morning:

According to the Federal Reserve Bank of Cleveland, the median Consumer Price Index rose 0.3% (3.5% annualized rate) in December. The 16% trimmed-mean Consumer Price Index rose 0.2% (2.8% annualized rate) during the month. The median CPI and 16% trimmed-mean CPI are measures of core inflation calculated by the Federal Reserve Bank of Cleveland based on data released in the Bureau of Labor Statistics' (BLS) monthly CPI report.

Earlier today, the BLS reported that the seasonally adjusted CPI for all urban consumers rose 0.1% (1.8% annualized rate) in December. The CPI less food and energy rose 0.3% (3.4% annualized rate) on a seasonally adjusted basis.

Note: The Cleveland Fed released the median CPI details for December here.

Click on graph for larger image.

This graph shows the year-over-year change for these four key measures of inflation. On a year-over-year basis, the median CPI rose 2.4%, the trimmed-mean CPI rose 1.9%, and the CPI less food and energy rose 1.8%. Core PCE is for November and increased 1.5% year-over-year.

On a monthly basis, median CPI was at 3.5% annualized, trimmed-mean CPI was at 2.8% annualized, and core CPI was at 3.4% annualized.

Using these measures, inflation picked up a little year-over-year in December.  Overall, these measures are close, but still mostly below, the Fed's 2% target  (Median CPI is slightly above).

by Calculated Risk on 1/12/2018 08:43:00 AM

On a monthly basis, retail sales increased 0.8 percent from November to December (seasonally adjusted), and sales were up 5.4 percent from December 2016.

From the Census Bureau report:

Advance estimates of U.S. retail and food services sales for December 2017, adjusted for seasonal variation and holiday and trading-day differences, but not for price changes, were $495.4 billion, an increase of 0.4 percent from the previous month, and 5.4 percent above December 2016. ... The October 2017 to November 2017 percent change was revised from up 0.8 percent to up 0.9 percent

Click on graph for larger image.

This graph shows retail sales since 1992. This is monthly retail sales and food service, seasonally adjusted (total and ex-gasoline).

Retail sales ex-gasoline were up 0.4% in December.

The second graph shows the year-over-year change in retail sales and food service (ex-gasoline) since 1993.

Retail and Food service sales, ex-gasoline, increased by 4.9% on a YoY basis.

The increase in December was slightly below expectations, however sales in October and November were revised up. A solid report.