Economic Update - June, 2022

posted on Wed, Jun 26, 2024

The purpose of this update is to identify any macro level red flags for a potential recession in the near term.  The past 2 years have been unprecedented.  COVID-19 simultaneously put an end to the last market cycle and created a new one in a very short time frame.  The end result will most likely be a shorter than normal market cycle.  These updates will become more important now so we can proactively approach your investment strategies.

We will breakdown the analysis into 2 components:

1) EARLY WARNING - Inverted Yield Curve

An inverted yield curve is when the 10 year U.S. treasury rate falls below the 2 year U.S. treasury rate for a period of time. The last 10 times this happened (since 1955), the U.S. economy entered a recession within the next 16 months (on average).  It has historically been a great early warning sign for an upcoming recession.

As of June 17, 2022 the 10 year Treasury rate is 3.245% and the 2 year Treasury rate is 3.172%.  That is a very narrow spread between the 2 rates and we had a very brief inversion back in April, 2022.  We would typically want to see a longer inversion period as a red flag for a recession, but as you will down below we may already be in or approaching a recession without that.

2) CURRENT STATUS - Economic PI Baseline

To get a sense of what the current economic state looks like we use the BaR Analysis Grid©.  By plotting 19 key economic indicators, the grid clarifies current economic conditions and signals how near the economy is to a recession. The mean of coordinates (MoC) indicates the overall health of the economy. Leading indicators (LD) are a subset of indicators that provide insight into emerging trends.  A more in depth analysis on how to read the chart can be found HERE.

It is helpful to see a comparison between the last few months.  There is not a lot of positive data to report.  Almost all the data points have huddled near a late market cycle and you still have the same 3 in the contraction or recession quadrant.  

Conclusion:

There are 4 major stages to an economic cycle:

1) Early Recession - Consumer expectations are at their worst, industrial production is falling, interest rates are at their highest and the yield curve is flat or even inverted.

2) Full Recession - GDP has been retracting quarter over quarter, interest rates are falling, consumer expectations have bottomed and the yield curve is normal.

3) Early Recovery - Consumer expectations are rising, industrial production is growing, interest rates have bottomed and the yield curve is beginning to get steeper.

4) Late Recovery - Interest rates can be rising rapidly, with a flattening yield curve. Consumer expectations are beginning to decline and industrial production is flat.

Based on the data from this report, as of June 17, 2022 it appears that we are firmly in the late recovery stage and potentially even in an early recession.  

Please feel free to contact me anytime to discuss your personal situation in more detail.

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