In the summer of 2007, I used insights from two particular economic measures to warn of the recession risk that later became a reality by early 2008. Given the anxiety raised by the “Brexit” vote, it’s a good time to see what these indicators are telling us about recession risks today.
“Vulnerable” is the word I would use to describe what the two measures of business investment tell us about the state of the U.S. economy at the moment.
The economy is vulnerable because business investment in equipment has already fallen off the past couple of quarters. This kind of investment is a critical determinant of future economic growth because it’s most likely to create jobs.
The second measure—initial unemployment claims—is one that I think of as a related and indirect measure of business investment. If cuts to equipment investment persist, then the impact is next felt in cuts to workers who make the equipment and related goods.
Now, unemployment claims have yet to move higher, which is a good sign. But it’s the measure to watch most closely going forward because it’s released weekly. As a result, it can be a leading indicator of business investment, which lags in its quarterly release.
So I’ll be keeping an eye on these two measures—plus a third measure—to see how the U.S. economy responds in the wake of the anxiety created by the United Kingdom’s vote to leave the European Union.
The third measure to watch is confidence or sentiment. Ultimately it’s the degree of the anxiety raised by disruptions such as Brexit that determine whether or not a vulnerable economy falls into recession. My sentiment measure of choice is spending confidence (see the latest on confidence trends here).
So will Brexit trigger a global recession? The only certainty is that it will trigger a downturn in the U.K. economy. Whether the U.S. economy and others follow depends on whether anxiety turns to panic. If so, then, the U.S. faces a significant risk of recession.
Copyright © 2016 MacroSavvy LLC. All Rights Reserved