E My Take On Recessionary Indicators

Despite the regularity of economic downturns and the existence of business cycles in a free market economy it is quite obvious that recession calling remains an art more than a science with the scientists being wrong consistently. Of course, this is somewhat understandable given the non-capitalistic dithering by the government as well as the central bank to try to prevent or delay downturns which often make things worse save helping political careers and empowering bureaucrats and state agencies at the cost of the greater good and welfare of the general populace.

The simple fact is you are hoping for some clear warnings of an economic downturn from the central bank or economists you have a better chance determining recessions by watching traffic patterns or tracking lipstick sales. Below is a great graph highlighting the poor recessionary calls by economists. 

Needless to say, following economic forecasts is a great way to get waylaid more than a way to riches like your investment advisors say to you to justify their outsized fees. One would be better off looking at the frequencies of recessions of the graph below and realize that save for twice in your life avoided a downturn for more than a six year timeframe before another one comes along. If you are more fortunate you may have seen 3 of them but also experienced a world war.

Also noticeable on this graph is a fundamental reason why the US is weaker not stronger after this recent downturn. Not only is businesses weakly investing in capital equipment and labor, residential investment has fallen off a cliff and is still not anywhere close to recovering. Of course, one can’t blame people for not investing in their home given most homes remain artificially supported by Federal Reserve low interest rate policies, rules that allow banks to hold properties on their books and not sell them at artificial prices, and Fannie Mae and Freddie Mac still dominate the housing loan market with government liquidity making the US housing market about as capitalistic as the USSR. The result is a giant vote of no confidence reflected in low housing investment as well as low investment overall. 

Anyways on to some of the reasons why economists are always late to the party when it comes to recessions. One reason is their consistent focus on indicators that are far from leading. These are industrial production, real personal income, nonfarm employment, and real retail sales.

As we can clearly see in the graphic, these are post not leading indicators. Worse yet, the indicators are reported and amended after the fact and not as they occur as most economic reports are. Despite this economists cling to this as does the government and central bank which allows them to be the optimists they always aspire to be making their jobs irrelevant.

Therefore, when you get thrown graphs such as this showing how healthy the economy is and how unlikely a recession is around the corner it reads as a big fat zero to me in proving anything besides last quarter we weren’t in an economic downturn yet.

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