Friday, 5 August 2016

Next Recession in the U.S. Coming on June 2017 ?

Nobody knows, but we can make educated guesses, trying to steal a glimpse of the future.

First and foremost, economic expansion followed by economic contraction (aka recession) is as certain as sunrise followed by sunset. Unless we're saying that the current Fed Chair Janet Yellen has able to abolish this business cycle successfully where all other previous Fed Chairs had failed. Do you really believe that? No, i don't think even Yellen believes that.

Of course, the $6 million question is not if, but when the next recession occurs.

U.S. Real Gross Domestic Product from 1957 to April 2016
Real Gross Domestic Product from 1957 to April 2016
Click chart to enlarge

It is overdue, according to many. The grey bars in all the charts in this post represent recessions, and the white space between the grey bars represent economic expansion or growth.

Let's put the graph above in table format and get some average figures. This is the one i prepared earlier.

Economic expansions and contractions from 1929 to 2009
Economic expansions and contractions from 1929 to 2009

As you can see from the table that the median period of expansion is 4 years and 2 months. Since the last recession ended in June 2009, if you add that to 4 years and 2 months, then the next recession should occur in Aug 2013. Evidently, this is why some people say the recession in the U.S. is way overdue.

Clearly, we didn't have a recession in Aug 2013. Perhaps, economic expansions are growing in length in the U.S. economy, because of the fact that we have been living under the easy monetary policy since Alan Greenspan. So it makes more sense if we should get the average lengths of the last 3 expansions. This gives us an approx average length of an 8 year expansion. So we can expect the next recession to occur on...drum roll, please...

June 2017

You would probably say, hold your wild bronco! It's can be that simple. Of course not. Why not???!!!

Still it's a reasonable number. For the sake of looking deeper, let's delve a little deeper.

1st, let's look at the labour market.

U.S. Civilian unemployment rate from 1948 to June 2016
Civilian unemployment rate from 1948 to June 2016

Without fail, the unemployment rate bottoms not long before a recession (indicated by the grey bar) starts, every single time!

This is no coincidence at all. In fact, it makes perfect sense. Say we're having an unemployment rate of 20%, meaning 20% of the population has low power of consumption. As the unemployment falls from 20% to 10%, you have extra 10% of the population who have increased their power of consumption. This leads to economic expansion. Since U.S. economic growth is relied heavily on consumption, a reduction of unemployment would lead to increased consumption, and therefore increased economic growth.

What happens if unemployment has reached its lowest level? Well, the population has reached its maximum consumption increase. Unemployment bottoms means consumption peaks. Look at the chart!

In all cases, the unemployment rate bottoms near the start of recession, and peaks near the end of recession (there're only 2 cases - 1992 and 2002 - where unemployment rate continued to go up considerably after recessions were over. Perhaps, due to the easy funny money economics). In short, you could very well define the business cycle in terms of unemployment rate.

Looking at the chart, the circle area shows that U.S. unemployment rate is bottoming as it reaches the trend line i've drawn. There's only so low that unemployment rate could reach. And looking at the circle area, it will probably intersect the line around June 2017 (possibly 2018).

Actually, the curve doesn't have to continue to move down, it could just start to move sideways from here for a few months (4 to 6 months), and reverses course for another few months (4 to 6 months). The multi month reversal is the clearest sign that recession is starting.

For the curious like myself, who may wonder why the bottoms of unemployment rate is trending higher over the decades? Here i hazard a guess. Remember this is a Civilian unemployment figure, because of technology, the size of military personnel is shrinking as a percentage of the population over the decades. Uncle Sam, who is one of the biggest employer, is hiring less over the decades, leading to higher unemployment rate.

The bottoms in the unemployment rate chart in the early 1970s, 1980s and 1990s are considerably higher. Why? Because the American GIs, the Generation X,  started to return home from the Vietnam War in early 1970s. Coincidence? Perhaps...

In the past, wars had been waged to boost economic growth of a country.

The bottom line is, how low can unemployment rate goes, right? It can't and had never goes to zero (at least not in the modern times).

The Jobless Claims chart is just another way of looking at the labour market.

U.S. Civilian unemployment rate from 1948 to June 2016
4-week moving average of Initial Claims from 1967 to July 2016

Again, looking at the circled area, it would intersects the trend line i drew in the vicinity of June 2017 (possibly 2018).

When this article is published on 5 August, there's a job report coming up in a few hours . I expect there would be more jobs created for some months to come. This translates to the lower unemployment rate. This means the curve is going lower and reaching 2 of my trend lines in the 2 charts above.

In other words, good news is bad news. When thing seems the rosiest, it's time to take a turn for the worst. It's the opposite of the expression of "it's darkest before dawn".  It's more like the candle burns the brightest just before it goes out. There's nothing negative about this. This is how cycle works. Neither good nor bad unless one is saying that Janet Yellen has found Aladdin's magic lamp and asked the Blue Genie to eliminate business cycle once and for all. Recession WILL come. Sooner than later. You can't wish it away (unless you have found he magic lamp).

Now, for something completely different (as the Monty Python said).

Let's now turn our eyes to Freight Transportation Services Index. This shows the total goods being moved around in the economy. Less goods are shipped implying less economic activities.

U.S. Civilian unemployment rate from 1948 to June 2016
Freight Transportation Services Index from 2000 to 2016

This transport figure doesn't goes as far back as the labour market figures, but it still gives us something to work with.

As seen in the chart, the Transportation Services Index goes up at the end of a recession or the start of an expansion. And after a period of gentle falling sloping trend, the economy enters the recession. The Index has been in this gentle declining line for some years.

For those who are investors in the equity market, they're more familiar with the Dow Theory and the Dow Jones Transportation Average.

Dow Jones Transportation Average
Dow Jones Transportation Average

This Wall Street index tells us that things aren't looking up in the economy. In fact, it says things have been looking down since 2015, according to this chart.

I'm not god (in lower case 'g'). I don't own a crystal ball. I'm not even an economist (nor a Yank).  So I can't (nor can any economist) say with any kinda precision that the next recession in the U.S. occurs on June 2017 (possibly 2018). If there's a recession any time in 2017, i consider my forecast hits the bull's eye.

What i like to do now is what the economists and Wall Street types do often, give a range of probability on any forecast. Here's mine.

Recession Probabilities:
10% for 2016.
50% for 2017.
40% for 2018.

I consider the recession occurs in 2018 the latest.

If i'm right, would i be awarded $6 million?

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