Business Irish

Monday 17 December 2018

Don't ask an economist if we're due a recession

Saturday insight

Boom to bust: Investors outside the stock exchange on Wall Street following the crash of 1929. Photo: AP
Boom to bust: Investors outside the stock exchange on Wall Street following the crash of 1929. Photo: AP
Former Fed chief Alan Greenspan talks pants. Photo: Bloomberg

David Chance

With the US economy posting its longest expansion on record, Europe heading for five straight years of growth, and our own Celtic Hare bounding ahead as if it were on steroids with a 7pc expansion, talk is inevitably turning to the next recession.

In part this is down to the idea that economic growth cycles eventually die of old age or, failing that, get killed off by a central bank's overzealous interest rate hikes.

Two-thirds of economists are now forecasting a recession in the US in 2020. The problem is that they have been putting the chances of a downturn in 18 months' time at roughly 30pc ever since 2014.

"If you like forecasting recessions, you can always say the next one is 18 months away. If the boom continues, people will forget (you can always push your forecast back), but if the economy suddenly deteriorates, you'll be a hero (of sorts)," according to Dario Perkins, an economist and managing director of global macroeconomics at investment advisory firm TS Lombard.

The economics profession didn't exactly cover itself in glory when we were hit with the worst recession in 80 years in 2008.

That's not the first time.

An International Monetary Fund survey published this year, covering 63 countries for 1992 to 2014, showed there were a cumulative 153 years in which recessions were occuring, that's 12pc of the time. Economist forecasts issued in the April before the recession hit predicted just five.

What about financial markets? The so-called "inverted yield curve" where longer term interest rates on government bonds are lower than the short term rates set by central banks has been a good indicator of a coming recession as it indicates that a central bank may have to cut rates.

Former Fed chief Alan Greenspan talks pants. Photo: Bloomberg
Former Fed chief Alan Greenspan talks pants. Photo: Bloomberg

That indicator is flashing red in the US as the two-year to 10-year spread on Treasuries stands at about 25 basis points. However, it has been sending a danger signal for most of this year and the US economy has continued to grow strongly.

Yield curves, however, may have been rendered less useful as central banks have hoovered up trillions of dollars worth of government bonds across the globe and in addition an ageing population boosts demand for safe-haven bonds. As for stock markets, forget them. Paul Samuelson, one of the greatest economists of the last century, famously quipped that "the stock market has forecast nine of the last five recessions".

So here are a few alternative "recession indicators" to consider:

Alan's underpants

Alan Greenspan, the former Federal Reserve chair, observed that sales of men's underwear can detect the beginnings an economic slump. Sales are usually stable because they rank as a necessity - 3.4 pairs per man a year. But at of financial strain sales will start to decline.

Recession or not? No, underwear sales are booming globally and are set to hit almost $12bn by 2020 and Mr Greenspan's record as Fed chair was shredded by the 2008 recession.

Babies

Earlier this year, the National Bureau of Economic Research published a study of the 109 million births in the US between 1989 and 2016 and related the data to business cycles.

Its research showed that the 2008 recession "began in December, as later determined by the NBER, and by this time conceptions had already been in decline for months", well before the collapse of Bear Stearns and Lehman Bros.

Recession or not? We might be in trouble as the number of births in the US fell 2pc in 2017 to 3.8 million, the lowest since 1987. However, that was the third consecutive year of declines, so perhaps not as the economy kept on growing.

Skyscrapers

Investment bank Barclays compiled the "Skyscraper Index" which showed that the construction of ever-taller skyscrapers was a good predictor of recessions, citing New York in 1930, Chicago in 1974, Kuala Lumpur 1997 and Dubai in 2010. Recession or not? We're doomed. In 2017, 144 200m- plus buildings were completed across the world, beating every previous year on record.

Even worse for the economic outlook, 15 supertall buildings, 300m or higher, were completed, a tie with the record in 2015.

Cardboard boxes

Most of the world's non-durable goods are shipped in cardboard boxes, so when cardboard box sales rise, companies are shipping more goods and that means the global economy is in fine shape.

In 2008, Smurfit Kappa, one of the world's largest producers of cardboard boxes, saw its operating profits cut in half.

Recession? Not at all, Smurfit Kappa's underlying revenue grew 7pc in the third quarter of 2018 and said that "As we start the fourth quarter, we see continued demand growth and further corrugated price recovery."

Eighteen signs the Celtic Tiger is back - See Review section

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