Despite What You Heard, Numbers Point Towards High Recessionary Condition Risk

Despite some of the rhetoric by the Fed and other media savvy economists, the objective data continues to indicate a higher risk of recessionary conditions. For instance, the Bureau of Labor and Statistics (BEA) released their latest estimates of gross domestic product (and in case you do not know, US GDP figures were revised upward on the inclusion of research and development and arts and entertainment expenditures into fixed assets. A great discussion and analysis of the change can be found at Political Calculations). The latest figures indicated that GDP increased at a 1.7% annualized rate in the latest quarter, better than the Street's guess.


That said, the year-over-year rate remains in the doldrums. The latest estimate shows that GDP increased by just 1.4% year-over-year in the latest quarter. Since 1947, year-over-year changes in GDP less than or equal to 1.5% and accelerating to downside typically continued its downward trend, all the way into a recession. The following chart shows the quarterly, year-over-year change in GDP with the 1.5% break point highlighted.

 

In some regards, the 1.5% rate may be arbitrary, but the above chart shows that a significant slow down in annual GDP growth is an important indicator of future recessionary conditions.

Additionally, remember, the 1.4% growth rate in GDP has occurred in conjunction with an ISM that has fallen below 50 and employment gains that are fast disappearing. We will get updates on these two data points later today and this week, but neither is a positive in regards to a slowdown in GDP growth.

More so, dividend cuts for companies in the S&P 1500 remains elevated. Historically, a rolling three month summation of dividend cuts, on the thesis that companies will only cut dividends for limited reasons, above 50 has corresponds with recessionary conditions both currently and prospectively.

Currently, the number of companies reducing dividends is above 100, well above the 50 demarcation indicating higher risks of recessionary conditions.

One last item of note, the annualized 13-week rate of change in M2 money supply is in decline.

A decline in the growth rate of M2, in of itself, does not necessarily indicate higher risks of recessionary. However, a slowdown in the supply of money in conjunction with other objective data points does create mosaic indicating that not only economic growth is slow, but is also falling.