Calculated Threat: Recession Watch Metrics

by Calculated Threat on 8/06/2025 01:21:00 PM

Early in February, I expressed my “growing concern” in regards to the detrimental financial impression of “government / fiscal coverage errors”, nonetheless, I concluded that publish by noting that I used to be not at present on recession watch.

Within the quick time period, it’s principally commerce coverage that may negatively impression the financial system.  Nevertheless, there different points of coverage that bear watching – particularly immigration.

Right here is a number of the information I am watching.  

Housing:  Housing is the premise of certainly one of my favourite fashions for enterprise cycle forecasting.

Normally when the YoY change in New Residence Gross sales falls about 20%, a recession will comply with.  An exception for this information sequence was the mid ’60s when the Vietnam buildup stored the financial system out of recession.   One other exception was in late 2021 – we noticed a big YoY decline in new house gross sales associated to the pandemic and the surge in new house gross sales within the second half of 2020.  I ignored that downturn as a pandemic distortion.  Additionally word that the sharp decline in 2010 was associated to the housing tax credit score coverage in 2009 – and was only a continuation of the housing bust.

The YoY change in new house gross sales in late 2022 and early 2023 steered a potential recession.  However as I famous earlier, I used to be in a position to look previous the pandemic distortion and was in a position to predict a pickup in new house gross sales because of the low degree of present house stock and since homebuilders might provide mortgage incentives that will considerably offset the sharp improve in mortgage charges.

There are not any particular circumstances now, and if this measure falls to off 20% a recession appears seemingly.

Yield Curve: The yield curve is a generally used main indicator.  I dismissed it when the yield curve inverted in 2019 and once more in 2022. Each occasions dismissing the yield curve was appropriate (the recession in 2020 was clearly because of the pandemic, so we are going to by no means know if the yield curve didn’t predict a recession in 2019).

Here’s a graph of 10-Yr Treasury Fixed Maturity Minus 2-Yr Treasury Fixed Maturity from FRED since 1976.

The yield curve reverted to regular a yr in the past and is at present constructive at 0.5.  If this inverts, this would possibly counsel a recession is coming.

Heavy Truck (and Car Gross sales): One other indicator I like to make use of is heavy truck gross sales.  This graph exhibits heavy truck gross sales since 1967 utilizing information from the BEA. The dashed line is the July 2025 seasonally adjusted annual gross sales price (SAAR). Be aware: “Heavy vans – vans greater than 14,000 kilos gross automobile weight.”

Heavy truck gross sales have been at 455 thousand SAAR in July, up from 443 thousand in June, and down 12.0% from 517 thousand SAAR in July 2024.

Normally, heavy truck gross sales decline sharply previous to a recession and gross sales have been somewhat tender not too long ago.

Car gross sales have been over 17 million SAAR in March and April as customers rushed to “beat the tariffs”.  Then gross sales have been depressed in Could and June.