The recession is coming, the recession is coming! Have you been hearing this lately?
I have been having conversations with clients all the time who are scared out of their minds! They’re very worried about when the next recession is coming. But before we declare that the sky is falling and put ourselves in a state of panic, let’s take a pause and dive in a little deeper.
In today’s video, I’m discussing:
- The role media plays in painting a “doom and gloom” picture
- Important key factors that indicate a recession and what they are telling us about the current economic state
- Trends to keep an eye on. History has been fairly consistent… what’s it telling us now?
5 REASONS WHY THE RUMORS ARE BOGUS!
I want to focus first and foremost on why the news media does what they do. They are trying to sell viewers! They want people to watch and keep watching.
In order to sell, the media continually parades out people who are coming on and talking about doom and gloom. The world’s coming to an end! The sky is falling! It’s in their best interest to do that.
Keep in mind that the news stations have ulterior motives – to keep you watching!
Today, I’m talking about 5 reasons why I don’t think a recession is on the horizon and why you may still want to be positive about the direction of the economy.
REASON #1: HOUSING STARTS
If you go back to August, housing starts were the highest they’ve been in 12 years and here’s why that matters; housing starts are a very important leading indicator. Builders do not build homes if they do not think that they can sell that home quickly.
Housing starts have been a very strong predictor of prior recessions. As housing starts and building permits deteriorate, it’s a strong sign that a recession is probably on the near horizon.
REASON #2: THE UNIVERSITY OF MICHIGAN CONSUMER SENTIMENT INDEX
The University of Michigan has a very popular, well documented index that they put out on a monthly basis. The most recent reading came in at 92. Anything above 90 is considered very popular or a positive indicator for continued growth. The fact that we’re still at 92, despite everybody out there being so fearful, says that the consumer still feels pretty good and is well in the range of positive as far as pointing to the economy continuing to move in the right direction.
REASON #3: INVERTED YIELD CURVE
The inverted yield curve has dominated the news along with the trade war with China, Mr. Trump and his Twitter feed. But the inverted yield curve is basically when short term rates are higher than long term rates. It signals that something is wrong because the shorter-term rates should be lower than long term rates. When they invert like that, it’s a sign for a lot of reasons that the economy may be slowing down.
Historically, on average, it takes about 18 months from the time that the yield curve inverts to the start of the next recession. It’s also taken as long as three years.
But it’s not the imminent sign that the news media would have you believe. It’s something to watch though. Just keep an eye on the inverted yield curve because it’s a strong leading indicator and has predicted every recession going back about 65 years or so without fail.
REASON #4: PROFITS OF BIG BUSINESS
The S&P 500 profitability is the earnings and profits of the largest 500 largest companies in the United States. What’s going on with those big businesses is a strong indicator of the direction of the economy.
Most of the companies in the S&P 500 have now finished reporting their earnings for the second quarter of 2019. Across the board, the average year over year growth and profits was 5%. Not like a massive growth and profitability, but it shows you that these companies and their profits are still moving in the right direction.
Over 70% of the S&P 500 companies in the second quarter of 2019, beat expectations on their earnings. This means that they reported better earnings, stronger earnings than what they had forecasted.
It’s a really strong indicator that the economy and big businesses are still going in the right direction.
REASON #5: UNEMPLOYMENT RATE IS LOW
Companies are still hiring, and the unemployment rate is still very low. The rate of job growth is slowing down because pretty much everybody who is employable has been hired at this point. The pool of applicants is getting much smaller and it’s harder and harder for companies to find qualified applicants. Although the rate of hiring of new jobs is slowing down, we are seeing more wage growth to counterbalance.
There you have it, 5 reasons to remain positive in this bipolar, economic climate that we’re in. One day we’re up and it feels good, then the next day it’s doom and gloom. Until a lot of these leading indicators begin to sort of roll over and change, I don’t really see a strong reason why we need to be negative about what’s going on.