So, with the election one year off, let’s take a look at “Will there be a recession on Election Day? The simple answer is, left to its own devices, almost certainly not.
Several months ago, analyzing the long leading indicators, I wrote that economic conditions would start to improve by about midyear 2020.
Although there has been some deterioration in several long leading metrics since then, that result has remained the same. Below I go through all of the same indicators (7 in all) and their status now. Remember that they suggest how the economy will be 12+ months out.
1. Corporate bond yields fell to new expansion lows a few months ago:
This is a positive.
2. The yield curve has in-inverted. When a recession has begun after an un-inversion, it has been within the next eight months (for our purposes, by the end of Q2 next year). Further, the Two year minus Fed funds metric never inverted enough to be consistent with a recession:
3. Real money supply has turned back to very positive:
4. Corporate profits adjusted by unit labor costs give a mixed result. Both are lower then their peak, from way back in 2012. But only one version has declined enough to be consistent with an oncoming recession:
5. Housing permits have rebounded sharply in recent months:
6. Credit conditions are mixed. The Senior Loan Officer Survey has turned negative, although not by much:
While the Chicago Adjusted National Financial Conditions Index remains positive:
7. Real retail sales per capita have been flat for a couple of months, but recently increased sharply and peaked in August:
To summarize, three of the seven indicators are unequivocally positive: corporate bond yields, housing permits, and real money supply; three are mixed: the yield curve, credit conditions, and corporate profits (with the period of overlap among the negative iterations being limited to the 3rd Quarter); and one is negative, but only slightly compared with its recent 3rd Quarter peak: real retail sales per capita.
So, while it is possible that a recession could be upon us in the 3rd or 4th Quarter of next year, if the economy is left to its own devices it is unlikely. (although Tarriff Man will do his best to undermine this).
Obviously, this is an argument for an incumbent party popular vote victory. But there have been 10 cases where the economy has been in expansion and the incumbent party’s nominee still lost. One was the “jobless recovery” of 1992. Almost all the others have involved war (1952, 1968), civil discord or scandal (1968 again, 1976, 2000), or a disliked incumbent party candidate and/or a party split (1912, 1992, 2016).
In short, the overall economic picture is a baseline. Non-economic factors having to do with the President’s personality or record do come into play as well (as will be explored by several other models). And it’s already quite clear that 2020 is going to include both civil discord and scandal.