Recession

?

September 26, 2018

Federal Reserve issues FOMC statement

Information received since the Federal Open Market Committee met in August indicates that the labor market has continued to strengthen and that economic activity has been rising at a strong rate. Job gains have been strong, on average, in recent months, and the unemployment rate has stayed low. Household spending and business fixed investment have grown strongly. On a 12-month basis, both overall inflation and inflation for items other than food and energy remain near 2 percent. Indicators of longer-term inflation expectations are little changed, on balance. 

Consistent with its statutory mandate, the Committee seeks to foster maximum employment and price stability. The Committee expects that further gradual increases in the target range for the federal funds rate will be consistent with sustained expansion of economic activity, strong labor market conditions, and inflation near the Committee's symmetric 2 percent objective over the medium term. Risks to the economic outlook appear roughly balanced. 

In view of realized and expected labor market conditions and inflation, the Committee decided to raise the target range for the federal funds rate to 2 to 2-1/4 percent. 

In determining the timing and size of future adjustments to the target range for the federal funds rate, the Committee will assess realized and expected economic conditions relative to its maximum employment objective and its symmetric 2 percent inflation objective. This assessment will take into account a wide range of information, including measures of labor market conditions, indicators of inflation pressures and inflation expectations, and readings on financial and international developments. 

Voting for the FOMC monetary policy action were: Jerome H. Powell, Chairman; John C. Williams, Vice Chairman; Thomas I. Barkin; Raphael W. Bostic; Lael Brainard; Richard H. Clarida; Esther L. George; Loretta J. Mester; and Randal K. Quarles.

DYI:  Let’s go through DYI’s recession indicators one by one.  Don’t worry there are only 5 so this will be brief and yet concise as these 5 are broad based macro indicators.

• Two year Treasury notes invert ten year Treasury bonds:

So far that hasn’t happen yet; however it is close with 2 year notes at 2.83% and 10 year bonds at 3.06% for a small difference of 23 basis points.  Making for a flat yield curve that has extended all the way out to the 30 T bond at 3.19%.  At this juncture no recession but it does turn on our radar.

• Widening credit spread…Comparing yields between 5 year T – Notes and Vanguard’s High Yield Corporate Bond Fund:

There has been some widening; as the expression goes “Not much to write home about!”  Technically yes, but is miniscule at best with 5 year T – Notes at 2.96% and Vanguard’s High Yield Bond Fund [junk bonds] at 5.58%.  Once the economy is in the very beginning stages of going south there will be a fall off of prices hence yields will begin to soar.  So far not much activity here.

• Declining stock prices…S&P 500 fifty day moving average below the two hundred day moving average:

So far not even close.  The index itself has not even broken through the 50 day let alone the 200 day.  Declining broad based stock is a zero.

• Declining Home Builders Index…The indexes fifty day average below its respective two hundred day moving average:

So far the fifty day average remains above the two hundred day average.  However the index itself has now dropped below the 50 day.  Not enough to go on a recession indicator but again it does bring up our recessionary vigilance.

• Purchasing Manager’s Index below 50:

This index is booming at 61.3 as of August 2018 [reported monthly].  No recession here at all.

Conclusion:

For all purposes only one indicator has gone negative which is widening credit spread.  However it is so small it could very easily be chalked up to statistical noise.  All in all no recession.  Be as that may be, this economy has been growing since March of 2009 making for one very long expansion along with an explosion in private [our citizens], corporate and government debt along with a massively overvalued stock and junk bond market.  When the next downturn does occur it is highly likely to be the nasty variety.

 DYI