2011-10-20

US Recession Indicators - October 2011

According to data from negative Real Interest Rates, another US recession is likely to begin between now and 2012 Q4, with 2012 Q1 the most likely... See below.


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Net Monetary Base vs Inflation (spread)

The growth of the Net Monetary base (M0 minus excess reserves) over inflation has been above the historical average since September 2010 and has remained high at 659 in September 2011.

These results continue to be high and any future recession will either be delayed or else the results will begin to drop drastically.

Already there has been two months of straight decline in both M0 and Excess Reserves (2011-08 and 2011-09 results). Nevertheless Net M0 remains positive because reserves had declined faster than M0.

Inflation in September was 3.9%, the highest it has been since October 2008. This is the third straight month of price increases since a deflationary monthly result in June. The rate of monthly inflation has decreased however, with 6% in July, 4.5% in August and 3.6% in September.

Note: A negative result implies that inflation is growing faster than the money supply, an event which indicates that a recession will occur within 1 to 36 months (with an average of 12 months)
Note: All recessions are preceded by a negative result.


Data Series:
St Louis Fed

AMBNS
EXCRESNS
CPIAUCSL
GDPC1
POP
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Federal Funds Rate vs 10 Year Bond Rate (spread)

September ended with a reading of 190 after 10 year bond rates continued to decline. This is the lowest spread since May 2008. The recent decline is increasingly precipitous.

What I said in August needs to be remembered:

If this indicator stays true to its historical data, then there will be one of two events leading up to the beginning of the recession.

The first is if the Federal Reserve will keep the Federal Funds rate effectively at zero, which it will do barring any major inflationary outbreak. If this occurs then 10 year bond rates will drop to zero as well, or at least converge to within a few basis points. This appears to be the situation currently.

The second event will occur if the Federal Reserve increases rates in response to an outbreak of inflation. If this occurs then the Federal Funds rate will exceed the 10 year bond rate, thus placing the indicator into negative and presaging a recession. Inflation has been increasing markedly in the last six months, so this event may yet be the result.
Will Ten Year Bond rates drop to zero? Or will there be an outbreak of inflation first?
Note: A negative result implies a highly restrictive monetary environment, an event which indicates that a recession will occur within 4 to 39 months (with an average of 22 months).

Note: If both the first and second graphs are negative at the same time it indicates that a recession will occur within 1 to 21 months (with an average of 11 months).

Note: All recessions are preceded by a negative result.



Data Series:
St Louis Fed

FEDFUNDS
GS10
GDPC1
POP

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Real 10 Year Bond Rates Rates

Real Ten Year Bond rates came in at -1.32% in September. As I have pointed out before, all experiences of negative 10 year bond rates since the 1950s have resulted in an eventual recession.

If we take previous instances of negative real bond rates into account, a recession will begin between now and 2012 Q4, with 2012 Q1 the most likely. These previous experiences also indicate that unemployment will also likely peak between 12.1% and 18.7%, with a result around 16.9% the most likely.
Note: Real Interest Rates based upon 10 year Bonds can indicate how the value of money is determined in comparison with the market's safest investment. A negative result implies that inflation is eroding the savings of those who have invested in 10 Year Bonds. A negative result over a three month average indicates that a recession may occur between 4-18 months, with an average of 8½ months and a median of 6 months.

Note: Not all recessions are preceded by negative real 10 year bond rates. Nevertheless all instances of negative 10 year bond rates (since the 1950s) have been followed by a recession.



Data Series:
St Louis Fed

GS10
CPIAUCSL
GDPC1
POP


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Market Capitalisation adjusted by USDX




(The orange line is the recession line, the red line is the line of resistance)

Data Sources




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