Identification of economic indicators to anticipate growth trends in the U.S. economy

Abstract

Business cycles essentially have four characteristic phases expansionary phase, peak, contractionary phase and the trough. There are certain cycle variables which characterise these cycles and could serve as an early indicator of an impending recession. These economic variables exhibit certain common trends during each phase which, if identified, can help us anticipate to future recessions. The Bureau of Economic Analysis publishes periodic data capturing the level of economic activity in the U.S. For the purpose of this project, the economic data pertaining to corporate income, Household income and expenditure, was obtained, modelled and analysed for trends and patterns. It has been observed that the corporate profits growth decelerates before recession and shows similar trend as GDP growth. Employee compensation growth, coincident with GDP growth, was also seen to decelerate before recession and was primarily attributable to increasing unemployment. Corporate profits, standing today, have been declining and can be attributed to the weakness in the energy sector. The household and corporate interest burden (Interest payments as a percentage of wages and net operating surplus respectively) have been found to reach their peak levels during each recession. Therefore, an uptrend in these variables serves as a warning sign. It has also been observed that the household interest burden starts growing in advance of corporates and remains at low levels, standing today, according to the latest data. From a credit standpoint, the non-financial corporates remain strong low interest burden and moderate growth in interest payments and present minimal risk of a recession in the next 6 months. That said, the interest burden hasn t fallen to post-crisis level observed earlier indicating that the economy might slip into recession at a lower peak level during the next cycle. Unemployment rate falls to its lowest level before recession and starts rising just before the recession. The unemployment levels however haven t shown a consistent range at which the reversal happens. Labour markets have been strong falling unemployment and considerable growth in compensation levels. However, the households haven t been leveraging at the same pace as that observed before the global financial crisis and the growth is lower than that of GDP meaning that they have actually been de-levering. This weakness in household debt growth could explain the muted growth in goods consumption despite strong consumer sentiment. Durables consumption invariably declines during every recession but presents very less predictive power. There has been a shift in the consumption patterns over the last 5 decades services make up about 70% of the household expenditure. Given the present conditions, the U.S. economy is unlikely to see an economic meltdown in the next 6 months based solely on the indicators identified using the last 8 economic cycles.