submitted by
Uric Dufrene, Ph.D., Sanders Chair in Business, Indiana University Southeast
The Federal Reserve received the data it needed to finally pivot from an inflation emphasis to a focus on employment, and along with that, a signal of the first interest rate cut. The last CPI (Consumer Price Index) came in weaker than expected, both at the headline number and the core rate (CPI minus food and energy). The PPI (Producer Price Index), issued just a day before CPI, also came in softer than expected. The favorable inflation readings, along with the weak employment report for July, combined to provide a green light to the Federal Reserve for a potential rate cut come September. Equity markets approved and are again pushing all-time highs. The market meltdown from early August is a distant memory.
Emerging from the pandemic has led to challenges for the economic forecasting industry. Predictions of recessions have yet to materialize. The last national employment report, for example, triggered the so-called Sahm Rule, which basically says that the economy is in a recession if the three-month moving average of the U.S. unemployment rate rises by more than .5 percentage points from the lowest 3-month average unemployment rate over the past 12 months. It has been historically accurate and only produced two false positives since 1959. 2024 may be the 3rd.
The yield curve, quite accurate for every recession since the early 80s, has also produced a recession signal that has yet to be accurate. The yield curve inverts when rates on 10-Year Treasury securities are lower than shorter-term rates, such as the yield on 2-Year Treasuries. The current yield curve became inverted back in July 2022, and a recession has not been declared. My outlook back in November 2022 included a recession call for 2023, and clues from the yield curve was one of the primary reasons. Higher interest rates have slowed the economy, as intended, but not to the extent of a recession declaration.
Another measure, industrial production, was also flashing a possible recession signal starting last year. Industrial production, which measures the output in manufacturing, mining, and utilities, coincides with a recession when year-over-year changes become negative. Going back to the 1920s, a negative change in industrial production not resulting in a recession has only occurred on three separate occasions. Over the past year, year-over-year changes in industrial production have hovered around 0, with 9 of 12 months being negative. So, the current cycle may be the 4th time that industrial production has turned negative, but absent a recession.
Another economic indicator with some information about the state of the economy is new claims for unemployment. As the economy slows, layoffs increase, leading to higher unemployment rates, less consumer spending, and an upward spiral of overall slower growth. For unemployment claims, the number to watch is about 350,000. This is not a precise rule, but when new claims for unemployment approach 350,000 or surpass that level, a recession may be likely. The latest claims for unemployment were at 232,000, and the highest level for 2024 was 243,000.
During a recession, consumers are expected to spend less on goods and services. But this is not always the case. In the 2001 dot com recession, spending on both goods and services increased from recession start to recession end. During the Great Recession, spending on services remained just about flat, but goods spending saw noticeable declines. In the quick Covid recession, spending on both goods and services plummeted, but quickly recovered and saw subsequent spikes in both goods and services spending to all-time highs. Goods spending saw some declines from 2023 to 2024 but has stabilized since. Services spending continues unabated. Based on recessions going back to 2001, reductions in both goods and services spending are not necessarily present during a recession, however. While we can probably rule out a complete collapse of the consumer, softening in both goods and services spending is still likely.
Data continue to point to an overall softening of the economy, but not quite a recession, just yet. The soft landing is in sight once again.
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