It’s been a while since I’ve posted something as boy it was a really busy time for me lately 🙂 I’ve managed to site for few minutes and one post cough my eye. More then a year ago I posted about coming recession and went trough few indicators. Let’s check how they are doing today:
GDP growth – last time I didn’t mentioned the most important factor for measuring of economy – GDP growth. We all know that economy develops in cycles and we all presume that cycles look like this:
But in real life it looks like this:
As you see actual recessions are quite short. Only 1-2y compared to growth periods of +10y. If not a DotCom bubble in 2000 I could even argue that full economy cycle took from 1990 recession to 2008. So almost 20y. This time recovery is visibly slower then it was in 1990-2000. The slower growth acceleration, the longer the growth cycle should be. From what I see 2010-2018 looks a bit flat on ~2% line, while in 1990-2000 was ~4%. So it doesn’t look like a peak to me right now. If that is a peak, it is a very poor one 🙂
Housing bubble – no bubble yet. If we look at RE growth YoY it look’s very similar to what was in 2002-2003. The growth was stable at 5-7%. Later it has accelerated to +10%. Now housing price growth has accelerated a bit from +5% in Y2015 to +6,5% today. So the growth acceleration is there, but until it is a double digit I think there is no overheating 🙂 If the growth will not accelerate like it did in 2003-2008 the cycle may take even longer to reach +10% maybe even 10y.
Fed rates – another indicator, which is more how US fed treats the economy. Year ago the rate was at 1% and the increase has continued. Now it stands at 2%. During that time stock market went up and lately it went down staying almost flat compared to what it was a year ago. It’s actually strange as your earnings from bank deposits has doubled and reach 2-3% and you still want to invest into stocks that pay ~1% dividends yield. According to the books rational investors should not invest in stocks that are considered more risky investment over deposits with higher returns. Coming back to recession I would say that 2% rate is not a indicator, but when it will reach 4%, which is estimated to be at Y2020, then I would say it is becoming hot. Either way compared to last year the rate has doubles so the risk of overheating has defiantly increased.
Inflation – another very important trigger. As you can see we had deflation period in Y2015, which was lead by falling oil prices and was not normal for economy growth cycle. Now inflation is back to 2%, which is a normal level. If inflation will continue to climb and reach 4% or more, then we have reached dangerous level. For now it look ok. In ideal world increasing interest rates should stabilize the inflation, but inflation is more impacted by salary growth, which is impacted by unemployment.
Unemployment – now this indicator signals that its a peak of economy cycle. As you can see unemployment has never been so low in the past. But more important how increased competition in labor market is effecting salaries.
Salaries growth – strange thing is that record unemployment do not boost salary growth and it looks to be stuck around 5% growth YoY. As you can see salary growth has peaked to ~7% growth prior to last recessions. So salary growth do not indicates overheating and as inflation looks to be normal.
Conclusion – all in all I think that US economy is not yet overheated. The only indicator signaling overheating is record low unemployment, but until it start inflating salaries on higher single digit side or even double digit YoY and will push inflation to something 4-5% we should not be in trouble. Logically tougher competition in labor market has to do that sooner or later, but in theory increasing FED rates should stabilize the situation so its a tough call. I say the situation look very similar to one that was in 2003-2005, but it depends how things will developed further. Either we will accelerate with the growth like it was last time and end up crashing in 2-3 years from now, or we will balance the growth and extend the growth period for another 10y.
Personally I would bet for the first scenario. Why? Because we are humans, and humans are greedy beings that wants to live better right now and not in 10y. This is why people elected Trump, as people want to live better as fast and as much as possible, which is what he is doing 🙂 Lets see if i’m right. We might also end up with long 10y and stable growth period. One thing for sure what I know is that recession is 1y closer then it was when I wrote about it last time 😉
Now what relates to the market lets see how my favorite ratio Shiler P/E is holding on. Year ago it was at 29.79 and continued to clime reaching 33 and just lately has little bit stabilized and felled back to 31.27 that is is today. Still it looks a bit overvalued. Continued FED rate increase should cool down the market further. On the other hand people are irrational beings so we might end up in DotCom bubble like it was in 2000 despite the increasing FED rates as it was back then.
What do you think my blog readers about economy, recession and market situation?