November 07, 2019
Over the years, one of my favorite activities has been connecting the dots concerning the direction of the general economy. Analogous to a weather forecast, economic predictions can be hit or miss as economics, like weather, is fluid and dependent on the convergence of events. With a doctorate in economics, numbers and data analysis are at the core of my assessment. However, engaging with frontline people and core industries, or “everyday people” (like the old song with the same name by Sly and the Family Stone), is critical to connecting the dots.
In this fall’s economic watch, there appear to be some economic storm clouds quickly brewing in the U.S. and around the globe. The tenured shoeshine person in the Hartsfield-Jackson Atlanta Airport indicated that business has dropped off significantly in recent months. The hairdresser who works the night shift at a local automotive plant indicated huge layoffs and a dramatic slowdown in orders. My trucker friends in some areas of the U.S. are noticing load declines. These frontline workers, functioning as my special operation scouts, often provide early economic warning signals. However, does the data show similar trends?
The Purchasing Manager Index (PMI) is a leading economic metric that has been flashing warning signs. A number above 50 is indicative of an expanding economy. A reading below 50 indicates a contracting sector. The PMI has been below 50 for two consecutive months after strong performance above 50 for over three years. This number is near or below 50 in Europe and China, indicating manufacturing recessions in those parts of the world. Slowing demand, along with supply chain management issues due to trade and tariff negotiations, are the main culprits.
Next, the yield curve has been inverted. An inverted yield curve means that short-term interest rates are priced higher than long-term interest rates. In other words, three-month treasuries are priced higher than 10-year treasury bills. An inverted yield curve has predicted every recession since 1959 and is usually present 12 to 20 months prior to a recession. The yield curve is now entering phase two, which means the curve is steepening as the Federal Reserve is making adjustments to ensure that long-term rates are higher than short-term interest rates. The steepening of the curve is often the result of monetary policy becoming more accommodative to prevent a recession, which could possibly be occurring here in the U.S. and in major economies around the globe. This steepening of the yield curve has also occurred in every recession since 1959, except one in the late 1990s.
To prepare for a possible economic slowdown ahead, collect your accounts receivable. Second, strengthen both your business and personal financial fortress as lenders tend to tighten credit during down cycles. The good news for agriculture is that the industry is usually not negatively impacted as a result of a U.S. recession, but could be impacted as a result of a global recession.