Recession and discretion: Meet your new business cycle indicator
|Summary
In this cycle, it has been not only safe, it has been profitable to ignore warnings from the LEI, the inverted yield curve and the ISM. This paper argues that it is not safe to ignore declines in discretionary spending.
The U.S. economy has pulled off a soft landing in defiance of multiple recession indicators that have been flashing red, in some cases for years. Recession can never be ruled out, of course, but even if one began today, the reputation of these once-trusted barometers has been tarnished. In this report, we describe how real discretionary spending serves as a better recession gauge.
Comfortably numb
Business leaders and financial markets have grown perfectly comfortable with the fact that they are conducting business as usual even as the security alarm, the fire alarm and the smoke alarm are all going off around them. In 2005 the late American writer David Foster Wallace delivered a commencement speech and used a parable to describe how the most consequential aspects of our existence are hidden in plain sight all around us.
There are these two young fish swimming along, and they happen to meet an older fish swimming the other way, who nods at them and says, “Morning, boys. How’s the water?” And the two young fish swim on for a bit, and then eventually one of them looks over at the other and goes, “What the [heck] is water?”
Lest we forget, let’s recap some signals that should be quite troubling for the economy:
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The yield curve has been inverted for more than two years.
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The Leading Economic Index has declined in 28 of the past 30 months.
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The ISM Manufacturing Index has been in contraction territory in 19 of the past 20 months.
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