No matter what the Fed does next Tuesday, the economy is most likely headed for recession. The August employment report was not a one-off event, but part of an overall pattern indicating a softening economy. Even prior to the latest release, year-over-year employment was already growing at a scant 1.4%, and with the August number now in the fold, growth is down to 1.2%. The following facts indicate the strong probability of recession developing in the period ahead if it has not already started.
1) Since 1953 there have been nine instances where year-over-year employment growth declined to 1.2% or less, and all nine occurred shortly before or after the start of a recession. There was not a single false signal.
2) Since 1960 there have been seven instances where year-over-year housing starts were down 30% or more, and six of the seven instances occurred shortly before or after a recession. There was one false signal in 1966 when a recession was narrowly averted and the S&P 500 dropped 25%.
3) Since 1960 there have been eight instances where the Conference Board leading indicators declined year-over-year, and seven of those instances were followed by recession. Once again the false signal occurred in 1966.
4) Of the last nine recessions, none were forecast by the consensus of economists, and even now, according to a Wall Street Journal survey, only 11 of 55 economists said there was at least a 50% chance, despite the depressed housing industry and credit market upheavals.
Summarizing the above numbers on employment, housing starts and the leading indicators, we have 24 data points, and 22 (92%) point to recession as opposed to two false signals. On the other hand the consensus of economists is 0 for 9. We see no reason why the recession signals will be false this time in light of the continuing collapse in housing and the re-pricing of risk in various markets throughout the globe.
The main bullish argument appears to be that the economy is still growing and that the Fed will keep it that way. We point out, however, that the economy always appears to be growing at the peak of a cycle, and that when we really get confirmation that it is actually declining, we are already deep into a recession. In fact, by the time the National Bureau of Economic research pinpointed the start of the last recession it was almost over. As for the Fed, since monetary policy works on the economy with anywhere from a 6-to-18 month lag, any action taken now will have little near-term effect.
