If you’ve been following the news, you could be forgiven for having no idea if the US economy is on the brink of a recession, in the midst of one, or humming along nicely. Perhaps we should start with a widely accepted definition of a recession but the trouble is that too is easier said than done. The common definition of a recession is two consecutive quarters of negative growth in gross domestic product (GDP) but it’s flawed as it’s backward-looking as opposed to predictive. It would be like placing your bets on Sunday’s football game the following Monday morning. Turns out that the formal arbiter of calling a recession is the National Bureau of Economic Research (NBER) and they use ambiguous language such as a “significant decline” in economic activity taking into account employment, GDP and consumer spending figures in order to make the call. But this too isn’t terribly helpful and the two definitions can conflict creating confusion and keeping everyone befuddled. Let me give you an example: the last time we had two quarters of consecutive negative growth was in the first and second quarters of 2022 when the GDP declined by 1.6% and 0.9%, respectively. Lay folks and certainly a handful of experts cried “recession” (using the two consecutive quarter definition) but Treasury Secretary Janet Yellen pointed out that “when you’re creating almost 400,000 jobs a month, that is not a recession.” President Biden also cited record job growth and strong foreign business investment to come to the same conclusion as Yellen (both implicitly embracing the NBER definition that there has been no significant decline in economic activity). Still, both definitions lack practical application as investors are forward-thinking and are looking for predictive indicators to infer whether broad-based weakness in the economy is on the horizon. Folks smarter than I have put forth different hypotheses (some quite quirky) to predict any pending downturn and one was widely followed by former Fed Chair, Alan Greenspan. Let’s review what some of these are (in no particular order):
Inverted Yield Curve
Pundits often cite the reliability of the inverted yield curve as one of the best indicators of a recession, so what is it exactly? From time to time, short term interest rates can be higher than longer term interest rates for an instrument) with the same credit risk profile (typically the two and ten-year treasury bills). This is unusual as the risk inherent in time suggests that longer term debt should reward investors with higher yield given the greater risk they are taking on. Inverted yields impact banks hard as they make their money paying lower interest rates on deposits and lending out that money at higher rates but when the yield inverts the business model for banks do as well. As a result, they stop lending and credit dries up for businesses and investors causing the economy to retrench. The theory makes sense but how well does it hold up in practice? Since 1978, inverted yields have happened six times (excluding the current inverted yield we are experiencing today) and, in every instance, the US economy entered a recession. That doesn’t bode well for the current inverted yield curve environment we are in but how long after the yield curve inverts does a recession typically follow? Approximately fifteen months is the answer and given that the most recent yield curve inverted in July 2022, we might be facing a recession three months from now in October 2023. And a yield curve that inverts for an extended period of time appears to be a more reliable recession signal than one that inverts briefly. But is this time different, some say yes? The lower interest rates on ten-year vs. two-year bonds could suggest that investors believe the Fed has tackled inflation and the further out we go timewise, lower interest rates are “normal” suggesting we are past the worst. You can forgive Harry Truman for wanting a one-handed economist on his staff. For firm believers of the inverted yield curve as a predictor of our economic fate (and there is more than anecdotal support to get on board this train), what should you do? You’ve heard the refrain “Don’t fight the Fed” and you shouldn’t. T-bill rates with three and six-month maturities are offering more than 5% risk-free to investors, easily exceeding the inflation rate running in the mid 3% over the past six months measured by the consumer price index. Perhaps it’s time to place that cash in short term treasuries. Many folks are with investor demand for T-bills surging to $13.4 billion in April 2023 compared to $1.6 billion in January 2022.
Champagne Index
Like a good New Year’s Eve party, good economic times are often reflected in the volume of champagne consumed. It’s widely known that Americans tend to reduce their purchases of champagne during economic downturns and this bears fruit in the numbers. In 2009—during the midst of the 2007-08 global financial crisis dubbed the Great Recession—a mere 12.6 million bottles were shipped, compared to 23.2 million bottles in 2006. Some of you may recall the dot-com recession where publicly traded internet companies were valued, in part anyway, by the number of monthly eyeballs on the site. When that bubble burst in 2001 so did the volume of bubbly sold, which fell to 13.7 million bottles—a drop of 42% from the year prior. In 2021 and 2022, consumers splurged purchasing approximately 34 million bottles each year, suggesting the government stimulus checks kept the party going. It’s too early to tell whether consumers will pull back in 2023, but this index is worth keeping an eye on.
Restaurant Performance Index
Historically, Americans tend to eat out less when times are tough stretching their budgets by cooking at home instead. In 2008 at the height of the global meltdown, the Restaurant Performance Index dropped to 96.4 (anything below 100 indicates a contraction). In April 2020, the index was below 95 (but many restaurants were closed) and one year later (post pandemic) the index was in excess of 106. The dining out index is arguably less helpful today than it was a decade ago as dining out and getting meals for takeout has become more central to our lifestyle suggesting restaurants will be more resilient than they were in previous generations.
Men’s Underwear
Of course we hope the Federal Reserve relies on better economic data than the sale of men’s underwear, but former Fed Chair Alan Greenspan revealed to an NPR correspondent that he monitored sales of men’s undergarments to help forecast economic downturns. Let’s hope he let that slip long after he was no longer in the role. The theory is somewhat sound, when the economy suffers and you need to cut back, why spend on things that aren’t seen? During 2008-2010 during the global financial crisis, men spent approximately $4 billion each year, compared to nearly $7 billion in 2023. During the global pandemic, sales slipped to $5.4 billion, compared to more than $6 billion the previous year. The index is of course flawed as dollars spent year to year fail to take into account inflation and the higher cost of underwear in 2008 compared to 2023 but, according to Circana, unit count dropped by 12% from 2021 and 2022 and households earning less than $50,000 per year spent significantly less on men’s underwear during that same time period. The men’s underwear index could use an upgrade with a focus on unit volume as opposed to dollars spent and further break down those numbers by household income.
French Fry Attachment Rate
Few patrons like the restaurant “upsell,” or the suggestion by wait staff to add a side to your meal or get a combo for only a few dollars more, but it turns out that the fast food industry pays close attention to this metric. It’s the so-called fry attachment rate and it tracks the rate at which consumers order a side of fries with a meal. For now, the data is more qualitative than quantitative and the message is mixed with the CEO of fry producer Lamb Weston ironically referring to French fry demand as “healthy” and the fry attachment rate as “solid” on the company’s last earnings call. McDonald’s CEO on the company’s April earnings call had a different view, however, saying the fry attachment rate is going down “slightly” in most markets around the world. This may be another metric to monitor closely as it provides insight into those households earning less than $50,000 per year.
Library Index
It should come as a surprise to no one that when times get tough, people seek out free services. New York runs the nation’s largest public library system and customer attendance at New York’s libraries peaked during the Great Recession, dropping every year since and falling off a cliff during the pandemic, which had more to do with library closures and lack of access than any sort of improvement in the economy. In 2022, in New York City library attendance has ticked up for the first time in more than a decade though numbers are still well below pre-pandemic levels. We will continue keeping an eye on library attendance as meaningful upticks are suggestive of trouble ahead.
Some of these metrics may be better indicators of a recession than others but there is enough data in all of them to suggest investors should proceed with caution. I know I am.
Liberto, D. (2023). Inverted Yield curve: definition, what it can tell investors, and examples. Investopedia. https://www.investopedia.com/terms/i/invertedyieldcurve.asp Gura, D. (2022, July 28). U.S. economy just had a 2nd quarter of negative growth. Is it in a recession? NPR. https://www.npr.org/2022/07/28/1113649843/gdp-2q-economy-2022-recession-two-quarters Baron’s, and Dreamstime(5). “Sales of Champagne, Lipstick, and Briefs All Form the Basis of Oddball Economic Indicators That Track Real-World Behavior.” Is a Recession Coming? Better Check Men’s Underwear Sales., Baron’s, 12 July 2023, https://www.barrons.com/articles/is-a-recession-coming-quirk-indicators-9da217fa?mod=Searchresults.