2011-07-20

US Recession Indicators - July 2011

According to data from negative Real Interest Rates, another US recession is likely to occur between 2011 Q4 and 2012 Q4, with 2012 Q1 the most likely... See below.


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Net Monetary Base vs Inflation (spread)

The growth of the Net Monetary base (M0 minus excess reserves) over inflation has been above the historical average since September 2010 and has increased even further with a June reading of 598. This is an increase from last month's reading of 540.

Since the introduction of QE2 in November 2010, the net monetary base has increased faster than inflation.
Note: A negative result implies that inflation is growing faster than the money supply, an event which indicates that a recession will occur within 1 to 36 months (with an average of 12 months)
Note: All recessions are preceded by a negative result.


Data Series:
St Louis Fed

AMBNS
EXCRESNS
CPIAUCSL
GDPC1
POP
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Federal Funds Rate vs 10 Year Bond Rate (spread)

The 10 Year Bond Rate has decreased markedly from 3.46% in April to 3.17% in May and 3.00% in June. The Federal Funds rate remains at near zero. As a result the June spread comes in at 291 basis points, well above the historical average but a decrease from the previous readings.
Note: A negative result implies a highly restrictive monetary environment, an event which indicates that a recession will occur within 4 to 39 months (with an average of 22 months).
Note: If both the first and second graphs are negative at the same time it indicates that a recession will occur within 1 to 21 months (with an average of 11 months).
Note: All recessions are preceded by a negative result.


Data Series:
St Louis Fed

FEDFUNDS
GS10
GDPC1
POP

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Real 10 Year Bond Rates Rates

Again a tweak to my reporting in this area after discovering that a three monthly average was better than a monthly result. I have also decided to call this indicator "Real 10 Year Bond Rates" rather than "Real Interest Rates" since the latter term can be used to refer to the Federal Funds Rate.

Real ten year bond rates came in at -0.12% in June. As I have pointed out before, all experiences of negative 10 year bond rates since the 1950s have resulted in an eventual recession.

If we take previous instances of negative real bond rates into account, a recession will start between 2011 Q4 and 2012 Q4, with 2012 Q1 the most likely. These previous experiences also indicate that unemployment will also likely peak between 12.1% and 18.7%, with a result around 16.9% the most likely.
Note: Real Interest Rates based upon 10 year Bonds can indicate how the value of money is determined in comparison with the market's safest investment. A negative result implies that inflation is eroding the savings of those who have invested in 10 Year Bonds. A negative result over a three month average indicates that a recession may occur between 4-18 months, with an average of 8½ months and a median of 6 months.
Note: Not all recessions are preceded by negative real 10 year bond rates. Nevertheless all instances of negative 10 year bond rates (since the 1950s) have been followed by a recession.



Data Series:
St Louis Fed

GS10
CPIAUCSL
GDPC1
POP


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