From now until next spring is the ugly period, when economic growth slows from over 6% to 3-4%, and inevitably overshoots briefly on the downside.
Some markets will be temporarily shrinking during this period as manufacturers who waited too long have to brake sharply to deal with soaring inventories. Shipping volumes are likely to change abruptly.
Here is the bad news in the last two months:
- New claims for unemployment insurance have jumped 20%.
- The purchasing manager’s index of manufacturing activity has dropped 4.5%.
- Home sales have declined 6%.
- Consumer confidence is 6% lower.
- The NASDAQ stock index has plunged about 25%.
- The ECRI index (estimates inflation six months ahead) has reversed from +1.0% to –3.4%.
- The 30-year bond yield is down 27 basis points.
- Monthly employment gains in economy have shrunk from over 200,000 to less than 50,000.
- Banks and other lenders have defensively tightened their credit standards denying credit to marginal borrowers.
But there is good news as well. First, only a few relatively weak quarters of GDP growth near 2% are expected before we return to the 3-4% range that the economy can sustain without reigniting inflation.
Second, the first market to hit bottom is now showing signs of recovering. Housing starts peaked early in the year and then weakened until a 1% upturn in last two months with more gains likely since building permits are up 4% and mortgage rates have dipped 25 basis points. Other markets will follow housing up just as they followed it down.