By Leah S. Dunaief
Amid the talk of a quarter-point rate cut by the Federal Reserve is the worry that the economy, doing well the past few years, may be heading into recession. Typically, the Fed cuts the rate, making money easier to come by, when recession looms. This makes it easier for business people to take loans to expand their businesses and encourages would-be homeowners to take out mortgages.
But we are not living through a typical scenario. Rates are already low. Business is already humming along, the GDP or gross domestic product is expanding although more slowly than last year, and doesn’t appear to need a stimulus. Unemployment is remarkably low, which usually triggers higher wages, which in turn can trigger inflation, which then prompts a rate hike, not a cut. But that also isn’t the case.
So what does the Fed know that we don’t?
Perhaps it’s just time for a recession to begin. After all, it’s been 10 years since the end of the Great Recession, which makes this the longest expansion in America’s history. Recessions do come. If we knew when, we could sell our stocks at their high and wait to buy our real estate at their low. The thing is, no one knows how to time the economy.
But this past Monday, in The New York Times Business section, there were four indicators listed that could sound the alarm. And lest you think not a lot of people care, just know that this was the best read article in the newspaper that day. So if you missed the indicators, I will share them with you now.
First tip-off could be from the unemployment rate. Even a tiny increase can be a telltale. When this rate rises quickly a recession is near or has already begun. But even a 0.3 percent increase in the rate over the low of the past 12 months is significant, and a 0.5 percent jump probably means we are already in recession. Now, however, the rate is not only low, it is trending downward. Historically that means a less than a one-in-10 chance of recession within a year.
The second indicator is the yield curve, about which I have written earlier in the year. When the interest rate on a 10-year Treasury bond is lower than the rate on a three-month bond, the yield is considered inverted. Just think about it. Wouldn’t the risk of tying up your money for a longer period be greater than for a short term? And if the risk for a longer period is greater, shouldn’t you be compensated with a higher interest rate? But no. That’s not the case. Longer term Treasuries have been offering the lower rates. In the past, however, “it has taken as long as two years for a recession to follow a yield-curve inversion,” according to The Times.
The third marker is the Institute for Supply Management Manufacturing Index, which is a survey of purchasing managers about their orders, inventories, hiring and other operating activities. When that index reads above 50, the manufacturing sector of the economy is growing; below it is contracting. This is a report that comes out the first of every month and is a leading indicator. But remember, manufacturing no longer drives the American economy. And with the global economic slowdown we are seeing and the trade tariff battles, the index may start to descend.
Last but certainly not least is consumer sentiment, which makes up some two-thirds of the economy. If we are not spending, the economy is not growing. A decline of 15 percent or more in the consumer confidence index would be worrisome. In that regard, so far so good. The index is pretty much the same as a year ago, although it has fallen since late last year.
So where are we? Your guess is as good as mine. Good luck to us.