To The Moon

This economy is frustrating.

A year ago, I spoke of several economic indicators at levels that historically precede recessions. A year later, we still aren't in a recession. Maybe I’m just impatient or too young to look at the longer-term picture.

In 2022, most economists were predicting a recession by the middle of 2023 — that didn’t happen. Now some are expecting a small downturn at the end of 2023 or none at all.

As we enter summer 2023, it's worth looking back at these indicators and what’s to come.

Flashing Indicators

One of the most common recession warning indicators is inversion of the yield curve, this typically precedes a recession in the near future.

The yield curve is the spread between the 10-year Treasury yield and the 2-year Treasury yield. When the 10-year Treasury yield goes below the 2-year Treasury yield, that is known as the yield curve inverting.

A normal yield curve slopes upward, reflecting the fact that short-term interest rates are usually lower than long-term rates. This is a result of increased risk and liquidity premiums for long-term investments.

But if you are pessimistic about the future, you will not invest as much in the future. Instead, you buy shorter duration Treasuries and are willing to pay a premium for them. Thus resulting in the year curve inverting.

The yield curve inverted first back in April 2022 for a few days and then again in June 2022, and has been inverted since.

Another common indicator, although it is somewhat counter-intuitive, is the unemployment rate, which is very cyclical.

Before recessions, unemployment rates are typically very low. And then during a recession, the unemployment rate unfortunately skyrockets.

The low levels of unemployment we’ve seen since 2022, around 3.5%, are below economists' “natural” unemployment rate of 4%. The latest reading in May 2023, was 3.7%, up from 3.4% in April. This will be a telling indicator by September.

Another indicator, one I have an extra interest in, is energy prices. As someone who works in the energy industry, price is crucial to business.

Rising oil and gas prices make living more expensive. Which in turn leads to less disposable income available for other purchases. With less money flowing around, a recession is more likely.

The graph below shows a proven track record. But after oil prices soared in 2022, partly due to the war in Ukraine, they have come down in 2023.

This image is from February 2022. Brent Crude peaked in June 2022 and has been falling ever since.

Oil prices have returned to normal levels, so normal that Saudi Arabia announced more production cuts, on top of a broader OPEC deal to limit supply, in an effort to boost prices.

So two of the indicators, the yield curve and unemployment rate, are still at levels indicating a recession, but have been at these levels for over a year. The other, oil prices, signal things may be alright.

What about the consumer though? After all, personal consumption is two-thirds of the US GDP.

How the Consumer is doing

The origin of my search down the rabbit hole of economic indicators this week was sparked by one chart: The Federal Reserve Assets.

I check this for updates every week. And to my surprise, it went up on Wednesday (June 7).

First, a brief background on this chart. As the Federal Reserve stimulates the economy with money, the assets rise. That is seen from 2021 to mid-2022. As the Fed tries to cool the economy (to battle the inflation they induced), their assets decrease as they remove money from the economy.

The sharp increase in May 2023 was from the SVB crisis, as the Fed added liquidity to markets. So I was surprised when it rose this week — albeit by a very small amount, but it should have been decreasing.

So I looked all over for why it would rise; why the Federal Reserve would be concerned.

My search led me to the US consumer. I had to combine a few graphs, but I got the picture I was looking for.

First, in the first quarter of 2023, total household debt rose to $17.05 trillion, the highest it has ever been. Below are the readings from Q1 of each of the previous years.

• Q12020 — $14.3 T

• Q12021 — $14.65 T

• Q12022 — $15.85 T

• Q12023 — $17.04 T

So consumer debt is increasing, not good, but people should be able to pay it off, right? Below are the delinquency rates on credit card loans and consumer loans.

It’s worth noting that levels are below historical means, but there is a clear indication that delinquencies are on an upward trend, which is not good.

If consumers don’t pay their debts, it has a waterfall effect, similar to the 2008 housing crisis.

Consumer spending is still strong. As a main driver of the US economy, that is promising. But taking a closer look, it may be driven by consumers taking on more debt, which is not a good thing.

On a year-over-year basis, loans are now increasing more than spending.

Final Thoughts

What does this all mean? No one knows.

What started as a search as to why the Fed balance sheet expanded led me to a wild search.

Maybe the Fed is preparing for the consumer to start struggling; debt levels are increasing, as are delinquencies, and the unemployment rate might be as well, which would only add fuel to the fire.

Powell’s speech on the 14th should give us some hints; I’m especially curious about what he has to say about the consumer.

Maybe a recession isn't coming and I was just paranoid; the increase could have been related to the new debt ceiling or nothing at all.

We’ll never know… or maybe we will in a few months when its too late.

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