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By New_Deal_democrat May 23, 2016 10:43 am
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The Next Recession

No, I"m not calling for it yet.  In fact the risk of recession at least through the end of this year appears to be fading fast.

But inevitably, the next one is out there.  And as we are past mid-cycle in this expansion, the shadowy outlines of that recession are in my opinion beginning to take shape.  Some of this you have heard from me before, some of it is filling in the blanks.

For the last 10 years, my template has been that in a consumer economy like that of the US, a recession happens when the average consumer runs out of gas. (http://www.dailykos.com/story/2007/8/28/377268/-)  That can happen because wages falter, because consumers can't free up spending money by refinancing debt at lower rates, or because important assets like houses or 401k assets stop appreciating.  Let's see where we stand.  

1. Refinancing has stopped.

Here's a graph of refinancing mortgage applications from Calculated Risk:

Mortgage rates, while near their 2013 lows, have not made new ones, and refinancing has remained near its nadir.

2.  Stock appreciation has stopped:

Here's the S & P 500 for the last several years:

It has not made a new high in a year.

3. House prices are still increasing, but sales have stalled out in the last year:

Since sales lead prices, I expect prices to stall out soon. 

4. But real wages have increased:

So consumer spending has continued to support the economy.  But decomposing real wage growth in nominal grown and inflation shows that the main driver has been virtually non-existent consumer price growth:

Underlying that flat CPI have been declining gas prices.  Since these have seasonality, let's look at them YoY and see if the decreases have gotten "less bad" enough to suggest that the bottom is in:

We appear to be close to a bottom in the gas price collapse, if not past it.

5. Let me just note that the yield curve has remained positive:


So a reasonably likely road map to the next recession looks like this:
1. Interest rates continue to fail to make new lows.
2. House prices and stock prices stop meaningfully appreciating.
3. Inflation picks up to 2% or more as energy prices begin to go up again.
4. Maybe - the Fed raises rates in response to increased CPI readings, perhaps enough to invert the yield curve.
5. Corporate lending stalls, housing turns down, and consumer spending begins to turn down, resulting in a recession.

Finally, as I have noted a number of times before, my biggest fear about the next recession is that it leads to actual wage deflation (nominal as well as real):

meaning a wage-price deflationary spiral becomes a significant possibility -- especially with an implacable austerity faction in control of one House of Congress.

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