Lakshman Achuthan, an economic forecaster and co-founder of the Economic Cycle Research Institute, recently told CNBC that he looks to the Income and Spending Growth Chart as a key indicator of the nation’s economy. Other experts, as we’ve written before, look to the yield curve, the gap between the 2-year and 10-year Treasury yields, as a key indicator and prognosticator of our economy.
Let’s look first at the Income and Spending Growth Chart.
In January 2018, spending growth registered 6%; in July 2018, spending growth registered 2%. Meanwhile, income growth is flat…wages for average workers have stagnated for years at approximately 2.4%, below the average of 3%. The only demographic with higher incomes is the upper 10% due to the December 2017 Tax Cuts and Jobs program.
In May 2018, Achuthan said that he believed the bull market trend was deteriorating. He called the economy at that time “cruising for a bruising.”
July 17, 2018, Achuthan said, “…a kind of stealth slowdown…is actually happening…If it (the economy) continues to slow, you have a window of vulnerability opening up where negative shocks that we can weather, when the economy is growing that become a lot more problematic.”
Achuthan believes that whatever the government has to say about the economy has to include adjustments for inflation. As of June 2018, the year/year inflation rate stands at 3.9% and the core inflation rate (without food and energy costs) stands at 2.0%. (The Consumer Price Index (CPI) determines Inflation rates.)
In April 2018, the inflation rate was 2.46%; in May, as we reported, the inflation rate was 2.80%. The overall rate of inflation for June 2018 stands at 2.87%.
Other experts look to the yield curve, the gap between short (2-year) and long (10-year) Treasuries, as a key indicator of the state of the economy. It makes sense that short term yields would be less than long term yields…the risk is greater for those investing in long term yields and they ought to be rewarded with more yield for taking more risk. However, if and when the gap between short and long term Treasuries drops below zero, or if and when the yield curve inverts, experts become nervous. Inverted yield curves (where short term yields are the same or higher than long term yields) usually signal a recession.
The yield curve right now is flat. At the rate the curve is currently dropping, an inversion is quite possible if the Federal Reserve keeps hiking interest rates.
Achuthan said, “The Fed is walking a very tight rope…the Fed knows deep down that it has to get rates back up that it has a few ‘bullets’ for the next recession.”