Economics: Stock Markets Predicted Nine Of Five Recessions

(Drivebycuriosity) - “The stock market has predicted nine of the last five recessions” said  Paul Samuelson (wikiquote ). The economist and Nobel prize winner was right, double-digit losses and even bear markets (a drop of at least 20%) happened often without an economic downturn (awealthof ). For instance the infamous "Black Monday" crash from October 1987 wasn`t followed by a recession. And what happened with the recession of 2016? (driveby).

Last week`s stock market reminds me of Samuelson`s insight. Again stocks are falling because there is a lot talk about a coming recession. On Friday markets responded unfriendly to news that China´s retail sales are slowing (in November growth dropped to  8.1% from 8.6%). The markets ignored totally that America `s retail growth is accelerating and that weekly jobless claims fell to a 40 years low (cnbc). This is typical for this year`s market: Negative news over overblown, positive fundamentals are dismissed. Wall Street is driven by sentiment again and herd behavior rule. Falling stock prices are creating fear and are inducing more people to sell,

The recession calls, which are pulling stock prices down, are unfounded as they were in 2016. In the past most recessions were caused by spiking oil prices and by the Federal Reserve. Nine out of ten of the U.S. recessions since World War II were preceded by a spike up in oil prices, wrote Prof. James D. Hamilton, University of California, San Diego ( pdf econweb). Another study by Prof.  Hamilton shows that the oil price shock from 2008 - from summer 2007 through July 2008 the oil price spiraled from about $50 to $147 -  turned the economic slowdown into a severe recession (econbrowser).: "The oil price increase over 2007:H2-2008:H1 should be regarded as a key development that turned the slowdown in growth into a recession" (archives).

Fortunately we are far away from the danger zone. In 2011 & 2012 the global oil price (represented by Brent Crude) hovered around $120 without causing a recession in the USA (brent-crude). So, the price of oil has to spike more than 100% to become a serious thread to the economy. The recent sharp drop of oil prices and Opec`s problems to raise the oil price again, thanks to the climbing US production and fracking, reduce the risk of an oil price induced recession considerably. Rising oil prices also would encourage more oil pumping and would extend the current oil glut.

                                                         (tradingeconomics )



Since World War II recessions were also often caused by the Federal Reserve who responded too late to rising inflation rates (wikipedia). Then the Fed needed sharp interest rate hikes to break the inflation mentality. This risk is also very low. The Fed already hiked her interest rates 8-times and there a no signs of an accelerating inflation. Inflation rates will be constrained because oil prices are getting tamed by the rising US oil production. Other prices are constrained by the Internet, automation & other aspects of the technological progress which are reducing the costs of producing & distributing stuff and therefore curb inflation (Amazon effect).

We are also far away from an overheating economy which could lead to overinvestment.  Recently economic growth slowed to about 2.5% annually (frbatlanta ). There is no bubble which has to pop. Banks are solid as their climbing profits demonstrate. Yes, there a signs of a labor shortage, but this is partly compensated by automation.

I agree that Trump´s trade war against China can do a lot damage to the US economy. If the current truce collapse US consumers would have to live with  much higher prices for many goods, less variety and a lower quality (because the US producer would have to face less competition and would be less inclined to produce high quality). A continued trade war would certainly slow down economic growth further in the US - but I doubt that it would cause a full fledged recession with more than one quarter shrinking GDP, imploding consumer spending & a return of the job less rate to 10% and more. The US companies are very efficient (earnings are growing this year about 20%) and lower taxes and reduced regulations would compensate at least a part of the trade war damages to the US economy.

BTW economic upswings don´t die of old age! This summer Australia’s economy entered its 27th year without a recession (reuters ). The Australians broke a record, which was hold by The Netherlands, which didn`t have a recession between 1982 and 2008. I don´t see a reason why the US should be unable to follow these examples. I assume that this correction will soon be forgotten as the corrections of 2011 & 2016.