Is the US already in recession? This is a question we keep asking ourselves, although we are not yet sure we have the answer. However, with the US ISM yesterday recording a fourth consecutive reading below 50, the odds that we are either already in recession, or about to enter one, keep rising.
The US Q4 GDP reading was 0.7% but this is an “Advance” estimate so we won’t know the true numbers for some time. This is because the numbers are subject to several revisions with the “Latest” quarterly numbers not published until late July. The average revision, ignoring sign, between the “Advance” estimate and the figures published in July is 1.2 percentage points.
The National Bureau of Economic Research (NBER) is well known for providing the start and end dates for recessions in the United States. Unfortunately their assessment comes with a considerable delay. The NBER did not announce the 2007/2009 recession until September 2010, so on that basis even if we are in recession we would have to wait til around April 2017 for the NBER to let us know!
That’s too long for a fund manager, so in the meantime we have to make our own judgement. Using historical data we know that there have been 17 recessions in the US since 1920 and in all 17 instances US industrial production turned negative on a year on year basis. US industrial production has been negative for the past two consecutive months (currently down 1.75%) so the odds of the US already being in recession seem quite high. There have been some false positives though. In 1934, 1952 and 1981 the US recorded two consecutive months of year on year declines in industrial production without the US entering recession.
Based on history we can say that two consecutive months of US industrial production has occurred on twenty occasions and in 17 instances the US was already in a recession. Put another way, history suggests that the chance of the US being in a recession is around 85%!
The bond markets are usually the first to spot such signs and the US ten-year has already fallen by almost 40 basis points since the end of the year which lends further support to this idea. With this economic backdrop we remain of the view that the best place to position yourself is in long dated, high quality, undervalued bonds. We own quite a few of those!