RUSS MOULD
AJ Bell Investment Director
The key things that could tell you if a US recession is coming Investors tend to spot the signs well before economists
US
Federal Reserve chair Jay Powell in his testimony to the US Senate Banking Committee in Washington declared a risk that America is heading into a recession. This represents refreshing honesty, especially for the head of an organisation with an unbroken record of failing to accurately predict any of the downturns seen since its foundation 109 years ago. That shows just how difficult it is to spot a recession – America’s National Bureau of Economic Research was a year late in flagging the US downturn that started towards the end of 2007, a delay that rendered any such insight totally useless, especially from an investment point of view. The question now is how can investors tell if Powell is right, especially as where America goes the world tends to follow? LAGGING INDICATORS In this respect GDP growth data is no use. It is published with a lag of a month or two and subsequently revised. Unemployment data is similarly ineffective from an investment point of view, for the same reason. Its only use may be as a contrarian indicator – once cyclical lows are hit then things can only get worse and vice-versa. US and UK unemployment rates currently stand at low levels. Job vacancy data may have more value. Lagging indicators which carry more weight include retail sales and housing, as both tap into how 70% of the US economy is driven by consumption. This year’s weakness in retail sales and the way in which new home sales have fallen year-on-year 10 times in 11 months are potentially ominous.
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| SHARES | 30 June 2022
CONCURRENT INDICATORS Sentiment surveys may bring more insight. A good one to consider for the US is the NFIB smaller companies business survey. Just under 30 million US firms employ less than 500 people and they represent all bar a couple of percent of the total workforce. The NFIB has gone below 95 three times since 1985 and each time signalled a recession (the indicator got down to 96 in the 2001-02 downturn). Sliding US smaller company confidence bodes ill
Source: NFIB, Refinitiv data
LEADING INDICATORS Believers in financial markets may prefer to put their faith in forward-looking indicators and frankly there may be few better ones that financial assets. Investors have skin in the game and money is on the line. Economists do not. Three useful benchmarks are small caps,
