U.S. Fiscal Forecast Weekly Update

This week we saw a solidification of the inverted yield curve for Treasury securities. While often interpreted as a sign of a recession, it is important to note that not all inverted yield curves have been followed by a recession. 

So far, there are no clear signs of a recession in the U.S. economy. To begin with, private-sector employment is still growing at healthy rates:

Figure 1

Source: Bureau of Labor Statistics

The average year-to-year growth rate in 2016-2019 was 1.73 percent. The number for November this year is 3.42 percent, which means that the growth in private-sector employment could fall by half, and all other things equal it would still not signal a recession. 

Over now to the two main indicators behind economic growth: private consumption and fixed capital formation (business investments). Again reported as year-to-year growth rates, but this time quarterly, the former is still growing at a respectable rate while the latter declined in Q3:

Figure 2

Source: Bureau of Economic Analysis 

Consumer spending increased by an inflation-adjusted 2.4 percent in Q3. The average for 2016-2019 was 2.43 percent, which means that American consumers have now returned their outlays to a relatively normal trajectory, despite high inflation. 

• The capital-formation number is more worrisome. As Figure 2 suggests, a dip in fixed investments precipitates a recession. However, when we disaggregate this number, things look a bit different:
• There is a decline in residential investments, i.e., home construction;

There is also a decline in investments in structures for businesses, such as offices, warehouses, manufacturing facilities;

At the same time, investments by businesses in equipment and intellectual property products, IPPs, are still growing. Their growth numbers are actually a bit higher than they were in 2016-2019, again adjusted for inflation. 

So long as businesses are increasing their purchases of equipment and IPPs, it means they are still expanding their operations. This is consistent with the observation that private-sector employment is growing at relatively high rate. 

There is one more reason not to predict a recession. In November, the Producer Price Index inflation fell to 8.2 percent, confirming that America is on the far side of a two-year inflation episode:

Figure 3

Source of raw data: Bureau of Labor Statistics

In short: there are no immediate signs of a recession in the U.S. economy.

The sharp decline in producer-price inflation will translate into lower consumer-price inflation, albeit more slowly. 

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We do not give investment advice. 

This blog provides analytical information solely for the purposes of 1) predicting the cost of the federal debt, and 2) for assessing the risk for a U.S. fiscal crisis. All information published here, forecasting and other, is based on publicly available data from the U.S. Treasury, including but not limited to approximately 65 percent of the current debt; on macroeconomic data, including but not limited to monetary policy decisions by the Federal Reserve; and on macroeconomic theory.