The Great Depression of the 1930s was a terrible thing and it exacted a terrible price. We didn’t have precise numbers then, but estimates put the unemployment level at more than 20 percent. Millions of people were essentially cast adrift, not knowing where their next meal will come from.
The pain and the price of the Depression were logged in clearly as we began rearming in the face of the growing threat of what would become World War II. The Selective Service Act launched the military draft, and the medical records reveal an appalling number of young men rejected due to their suffering from the effects of childhood diseases related to malnutrition.
The Depression also influenced the American “psyche.”As many as 30 years after the Depression ended, despite our multi-decade postwar economic expansion, people still worried and talked about how “the bottom’s going to drop out.”
Psychology, like a big dog, leaves footprints that are hard to erase. Here we are today, three quarters of a century after the Depression ended, and many people still distrust economic expansions. We don’t hear, “The bottom’s going to drop out” anymore, but we do hear and read the next best thing: a recession is coming soon.
Hardly a day goes by without some analyst or reporter insisting that the U.S. will move into recession later this year or at the beginning of 2020.
We look to economic indicators to understand the past and the present, and to predict the future of our economy. Recently, though, the indicators, especially those foretelling the future, have not provided a very clear picture.
One of the most respected and reliable data sources is the Index of Leading Indicators (LEI). It is published monthly by the Conference Board, a business-supported private organization. The index itself consists of 10 indicators, seven from government statistical data sources and three from nongovernment origins such as the Michigan Consumer Sentiment Survey and the S&P 500.
The indicators are formed into an index which has a historical record of having most of its movements up or down mirrored in the economy, on average, about a year later.
What is the LEI telling us now? Liz Ann Sonders, chief investment strategist at Charles Schwab Corp., recently noted that “over the last several months, about 60 percent of the 10 subcomponents of the LEI have been in worsening trends.”
We interpret this information at our own risk, though. The declining indicators are still at very high levels, for example, so we must consider whether that is a factor in the timing or not.
We should also give some consideration to the four indicators that aren’t declining. They could be quite important in determining the economy’s direction.
One important factor in our evaluation, and our estimate of our economy’s prospects, is that the current strength of our economy is largely the result of a psychological recovery more than any other single factor.
Americans experienced an attitudinal change, got some of their “can do” spirit back, and recovered their confidence in the economy.
The source or sources of these changes is a matter of some considerable debate, but of more importance is that we have no real experience with a psychology-driven economic recovery. In the past increasing positive attitudes had been the result of an improving economy, not its underlying energy source.
We don’t know, for example, if the role that psychology and attitude change played in our economic expansion makes it more vulnerable to a recession or less. It has, though, made us more observant of possible clues to changes in Americans’ outlook.
One thing is certain. This kind of “Little Engine That Could” economic expansion has already laid waste to a phalanx of economic forecasts and gloom-infused pronouncements of limited possibilities in employment, productivity and economic growth rates.
Does this mean that we’ll never have another recession? Hardly. Economic expansions, including this one, are built on credit — credit for businesses to expand and for households to buy their output.
Household debt continues to rise, automobile loan originations set a record in 2018, and outstanding student loans still climb.
All that is to be expected in an expansion, but there are some worrisome aspects.
Despite lenders’ moves to increase the quality of auto loans by insisting on higher credit scores, delinquency rates are still rising. And the student loan portfolio of $1.46 trillion still looks shaky.
Neither the household debt situation nor the Leading Indicators have reached the alarm level. Both remain in the “keep an eye on it” status.
Can do.
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