Recession imminent? Economic indicators to watch this year

The world is overdue a recession, or worse. US sharemarkets ended the year dropping a lot from earlier record highs and then recovering a bit, but still well off the highs. So what is likely to happen this year?

Reuters: Breakingviews – Three key indicators to watch like a hawk in 2019

Want to know whether there’s going to be a U.S. recession, a flare-up in the trade war, or a spate of corporate implosions?

…just stay focused on these three proxy indicators.

Soybeans. American farmers have been early victims of the escalating response to President Donald Trump’s import levies. When crops from other countries like Brazil are relatively more valuable, it suggests traders are more worried tariff barriers will persist.

U.S. yield curve. Different experts pick different comparisons, but in the past when the yield on 10-year Treasury bonds has dipped below the return on two-year government paper, a recession has followed. As 2018 draws to a close, the gap is once again very thin.

Corporate health. One hint at sentiment comes from indexes that track how many stocks in given markets are in bear territory, meaning they have fallen 20 percent or more in value from their peak prices in the last 12 months. About half are in that zone in developed markets and more in emerging economies. That might mean shares are cheap. Or it might signify negative sentiment and an accelerating slide in 2019.

This is very US-centric, but the health of the US economy has a major effect on the rest of the world, including us.

It is difficult to predict when recessions will occur, but one near certainty is that they will keep occurring. The world is overdue from an economic setback.

The New Zealand economy is in good shape, but can be easily impacted by overseas markets.

Fortunately Minister of Finance Grant Robertson took a prudent approach to his first budget in 2018. However there is pressure on the Government to deliver on it’s social promises – or at least on expectations on what a kinder more progressive government should be doing.

The best time for significant tax and social reform is when there is money available to do it, like now when our books are in surplus.

If major measures are not put in place before the next recession it will get a lot harder.

And back to the US – tax changes there have substantially increased US debt, so they are not in a good position to weather a recession. This could make an economic hiccup worse.

Leave a comment

45 Comments

  1. Noel

     /  3rd January 2019

    So it’s 2019. There goes the 8’s theory.

    Reply
  2. Reply
  3. The Consultant

     /  3rd January 2019

    And back to the US – tax changes there have substantially increased US debt, so they are not in a good position to weather a recession.

    Tax revenue is up – a record amount over the first nine 9 months of the 2018 fiscal year. – but spending is up even more, as has been the case for decades in the USA. Spending has substantially increased US debt.

    This Lefty bullshit just never, ever ends, for the simple reason that the Left is always opposed to reducing taxation because it always wants to spend more. And you can forget the implied argument that if tax rates had remained the same, the US would be hauling in even greater amounts of revenue. That has not been true since JFK and LBJ finally started cutting tax rates in the early 1960’s in order to boost tax revenue, which it did.

    But it never stops this relentless theme of the Left.

    Reply
    • “Spending has substantially increased US debt.”

      Actually the difference between spending and taxation (revenue) is what increases debt. The two are not independent of each other.

      Reply
    • kluelis

       /  3rd January 2019

      I would say the militant left and the militant right are relentless but they are the fearful fanatical minority. The truth be know the majority of the “Left” and the majority of the “right” are actually now days virtually the same.

      Reply
    • Duker

       /  3rd January 2019

      “Tax revenue is up – a record amount over the first nine 9 months of the 2018 ”

      Ahh your graph doesnt show that , just that tax revenue is tracking previous year- under some convoluted and cherry picked circumstances .
      I suppose you were trying to say tax cuts DONT lead to drop in tax revenue – duh

      Wasnt the tax cut at the beginning of 2017 ? So we dont see the numbers from 2016 or 2015 for that reason .

      Reply
    • Duker

       /  3rd January 2019

      So you are saying “. Spending has substantially increased US debt.”

      So the deficit was decreasing under Obama because he was cutting spending and now thats reversed with Trump and the Republicans controlling the budget.hahaha

      heres some real numbers showing cuts to company taxes have reduced income
      year income tax corp tax
      2015 1,540,802 343,797
      2016 1,546,075 299,571
      2017 1,587,120 297,048
      2018est 1,660,063 217,648

      https://www.whitehouse.gov/omb/historical-tables/
      Table 2.1—Receipts by Source: 1934–2023

      Reply
      • The Consultant

         /  3rd January 2019

        So the deficit was decreasing under Obama because he was cutting spending

        I realise that for many people the President of the US is simply a modern version of some old tyme Emperor.

        But POTUS is not.

        He doesn’t do spending at all: the House of Representatives does. And the House was controlled by the GOP for six years under Obama. Even then it’s notable that the proposed budgets he sent up were rejected with zero votes for several years: I think his last couple got a handful of votes. The House GOP and Democrats simply ignored his demands – for increased taxes and spending, and got on with fighting over their own proposals on such things.

        And it’s not even that the GOP were much good at cutting spending, the best that could be said was that they slowed it’s rate of climb – a little – and allowed tax revenues to catchup a bit, but not enough.

        BTW, those increased revenues happened despite the fact that the GW Bush tax cuts of the early 2000’s were not allowed to expire at the end of ten years but were locked in place permanently – with bipartisan support from the Democrats, and signed by Obama.

        Reply
  4. Blazer

     /  3rd January 2019

    the main problem is private debt.

    The U.S has the luxury of ‘printing’ money and has the default currency for international trade.

    @ TC…
    cutting tax rates in the early 1960’s in order to boost tax revenue, which it did.’

    HOW DOES THAT WORK?

    Reply
    • Gerrit

       /  3rd January 2019

      Blazer; even you will know that the more money in individual private circulation increases private spending and increases consumption taxes for the state.

      Problem, especially for left leaning governments, is that more money in individual private hands means less control of where it is spent, hence they always go for higher taxes to reduce the private money supply.

      After all the leftist state collective knows better than the individual where the money needs to be spent.

      It would be better to have no income tax but a higher consumption tax, the problem then becomes if people stopped spending the state coffers would dry up.

      Bit of a balancing act between the two forms of taxation.

      You have similar problem with CGT. Collection is totally depended upon money movement. No selling, no buying, no CGT.

      Hence the new notion that all invested capital must return a dividend that the state can tax. Even if that capital does not return a dividend.

      Reply
      • Blazer

         /  3rd January 2019

        why are the wealthy against a transaction…tax?

        Reply
        • PDB

           /  3rd January 2019

          NBR: “In short, the FTT appeals mainly to those who seek to get at “wicked bankers and evil speculators” but it’s pretty naive. It is unlikely to raise a lot of money unless there is a global agreement; otherwise it would leak like a sieve, penalise quite innocent and necessary trade, impede economic activity unnecessarily – all features of a bad tax.”

          Reply
          • Blazer

             /  3rd January 2019

            assumptions…there is already global accord on many financial transactions…B.I.S for instance.

            Reply
    • The Consultant

       /  3rd January 2019

      cutting tax rates in the early 1960’s in order to boost tax revenue, which it did.’

      HOW DOES THAT WORK?

      FFS! Although I should not be surprised. Go check Wikipedia, JFK tax cuts, Laeffer curve, etc. It’s pretty common knowledge in economics.

      Concisely: tax rates at zero % deliver zero tax revenue – but tax rates at 100% also deliver zero revenue. You can work it out from there, but suffice to say there is a sweet spot of tax rates from which increasing or cutting them will deliver less revenue – and that sweet spot varies from nation to nation and from time to time.

      A concise history on the JFK tax cuts:
      JFK wanted massive increases in defence spending, at a time when that formed a huge chunk of Federal spending; there were no Great Society programs, Social Security spending had not yet really kicked in because the ratio of worker:retirees was still very high, and most welfare programs were still at the State level as they’d been since the start of the USA;

      Democrats of the day did not believe in borrowing or using the Fed to just print money, so tax revenues were the only place to get the money. Problem was that the highest tax rate was 90% and even the economists of the day said that pushing it higher, or pushing lower rates up, would not bring in more revenue. Counter-intuitively they suggested that cutting tax rates would increase revenue. And so it did. Reagan and Kemp would repeat and win the same arguments twenty years later.

      Oh – and that’s why this graph exists:

      Reply
      • Blazer

         /  3rd January 2019

        ‘ It’s pretty common knowledge in economics.’….FFS!!…alright!

        Reply
      • Blazer

         /  3rd January 2019

        Call me Ishmael’s post…

        ‘“President-elect Donald Trump and the Republican Congress are planning to enact some type of tax reform. Many of the proposals floated involve large reductions in income tax rates (for businesses and individuals). Given the tax revenue response to George W. Bush tax cuts that followed Reagan’s, the odds seem pretty low that further reductions in tax rates, especially individual income tax rates, will result in anything except a decline in government revenue.”

        Reply
    • Pink David

       /  3rd January 2019

      “The U.S has the luxury of ‘printing’ money and has the default currency for international trade.”

      Venezuela also has the luxury of printing money.

      Reply
  5. kluelis

     /  3rd January 2019

    I think the first recession I remember was in 1969 when some farmer subsidies were removed. Over the next 5 decades there has been talk of recession very 3-4 years. 2-3 share market boom and bust cycles came and went too. But did life really change much during these recessional cycles? I don’t think so. My parents spoke of the “great” depression and I have read about it too. Over the last 50 years of recessions I have yet to see thousands lined up at soup kitchens and kids running round dressed in champion flower bags.There are recessions then there are recessions. Again it is almost an entertainment business talking recession life being so cruisy we need to invent an enemy to conquer from the safety of our key board.

    Reply
    • Duker

       /  3rd January 2019

      Governments provide safety net which reduces effects of a fall in growth .

      In reality the only ‘recession’ in NZ caused by direct action by government , was Richardsons mother of all budgets, which shocked the public into cutting consumer spending. Most of that was bad PR on her part – most of the welfare cuts ( there were some cuts to benefit rates) was her moving the disability spending budget from Social Welfare to health, which was around a $1 bill . She was sacked for her incompetence and grandiosity after the next election .

      Reply
      • Blazer

         /  3rd January 2019

        A pig of a woman…ugly as well…looks like an anaemic …man.

        Reply
        • PDB

           /  3rd January 2019

          Good to see you upholding the same commenting standards of Kiwiblog there Blazer…

          Reply
        • David

           /  3rd January 2019

          She has surprisingly lovely skin, I ended up in a lift with her and was quite taken with her but it was probably from having every media picture of her in an unfortunate expression.
          She did what needed to be done and her policies remain unchanged.

          Reply
          • Blazer

             /  3rd January 2019

            b/s David…she was toxic to National and they realised it.

            Priveleged, white,entitled,idealistic…harridan.

            Reply
        • kluelis

           /  3rd January 2019

          @Blazer. Very deep political analysis.

          Reply
      • kluelis

         /  3rd January 2019

        And were the policies she put in place changed significantly?

        Reply
        • Blazer

           /  3rd January 2019

          what policy specifically?Long ago.

          Reply
          • kluelis

             /  3rd January 2019

            Govt often sack ministers after they introduce unpopular policies to try and fob off complaints but the policies stay the same or are just renamed. So sacking Ruthy did not mean she did wrong in the eyes of her Gov’t .

            Reply
    • Kitty Catkin

       /  3rd January 2019

      They were dressed in flour bags, not flower bags, but the pattern was bleached out. Flour bags are lovely soft cotton.

      I remember the 80s crash, a friend was about to start a job with one of the big companies and was invited to their Christmas do in one of Wgtn’s most expensive places. As the market went down, so did the Christmas do, until it was cancelled altogether, as was the dream job.

      Reply
      • kluelis

         /  3rd January 2019

        To be honest I never even met any one who knew any thing about the ’80’s boom..it seemed to happen in some other parallel universe to most people.

        Reply
        • Kitty Catkin

           /  3rd January 2019

          And me. I just remember how the do kept becoming less and less impressive until it and the job were cancelled 😦

          I also remember a brief conversation between my stepfather and either his lawyer or accountant…he was asked if he wanted to lend money out on 2nd and 3rd mortgages (I think to farmers, but it may not have been just farmers) The return would have been 25% and 33%. He refused without even considering it; anyone who needed it that badly would be most unlikely to be able to repay it. You’d be buying the place again every 3 or 4 years !!!

          Reply
      • kluelis

         /  3rd January 2019

        “Flower” I put that in there to make sure you are doing your sub editor job rite.

        Reply
    • Pink David

       /  3rd January 2019

      ” I have yet to see thousands lined up at soup kitchens and kids running round dressed in champion flower bags”

      Yes, people have got rich.

      Reply
  6. PartisanZ

     /  3rd January 2019

    Keep ’em scared … Keep ’em stressed … even when they’re on holiday …

    Reply
    • kluelis

       /  3rd January 2019

      @PartisanZ. Keep ’em scared … Keep ’em stressed … even when they’re on holiday …They are coming out of the wood work now 🙂 Pitch forks and sickles at the ready 🙂

      Reply
  7. kluelis

     /  3rd January 2019

    @PartizanZ. “Keep ’em scared … Keep ’em stressed … even when they’re on holiday”
    …The loss to Ireland has Steve Hanson and his coaching staff on high alert 🙂

    Reply
  8. A common misleading claim has been that U.S. tax revenues have increased, even with the large tax cuts enacted last year.

    While it is technically true that fiscal year (FY) 2018 nominal revenue is higher than FY 2017 nominal revenue, revenue has fallen by more meaningful metrics. It has fallen in nominal dollars when comparing tax year to tax year and has fallen in real dollars and as a share of GDP under any scenario.

    Focusing specifically on revenues raised under the new tax code, revenue has declined by between 3.5 and 8%.

    Nominal revenue did increase, according to the US Treasury’s fiscal year-end report, which shows that total federal tax revenue is up only $14 billion, or 0.4%, between FY 2018 and FY 2017. That revenue growth rate is the eighth lowest in the past 50 years, and the seven lower years either coincided with a recession or tax cuts/expiring tax increases enacted shortly after a recession.

    However, this nominal increase is well below the rate of inflation in America – meaning that the value of revenue collection has actually declined in real terms.

    Total revenue over the time period in question has actually fallen by 1.5% in real (inflation-adjusted) terms.

    Measured relative to GDP – a sensible way to measure because a steady tax system would be expected to capture roughly the same share of the economy each year – we estimate revenue has fallen 4.3%.

    Relative to the revenue increases that had been previously expected from population growth, inflation, wage growth, structural elements of the tax code, and other factors, tax revenue is down by 5.7%.

    Even these numbers understate US tax revenue losses between 2017 and 2018 because they count revenue raised in FY 2018 but under 2017’s pre-tax cut laws.

    Excluding revenue collection related to last year’s code, total nominal revenue is down 3.6%, real revenue is down 5.4%, and revenue as a share of the economy has decreased by 8.1%.

    Jeffrey Dorfman of Forbes Magazine predicted exactly these outcome in his article on January 8, 2017:

    “President-elect Donald Trump and the Republican Congress are planning to enact some type of tax reform. Many of the proposals floated involve large reductions in income tax rates (for businesses and individuals). Given the tax revenue response to George W. Bush tax cuts that followed Reagan’s, the odds seem pretty low that further reductions in tax rates, especially individual income tax rates, will result in anything except a decline in government revenue.”
    Link follows
    https://www.forbes.com/sites/jeffreydorfman/2017/01/08/a-little-laffer-curve-reality-should-guide-republican-tax-reform/#27496062e618

    Dorfman also pointed out the shortcomings in the Laffer curve for those interested in learning more about how it works (and when it doesn’t).
    He continued:

    “Tax cuts that reduce government revenue are a positive thing if they lead to less government spending.

    However, if spending stays the same (or grows, per usual), then lower tax revenue just means more government debt.

    Taxpayers are not better off when they pay less in taxes if they simply lend government the amount saved on taxes in order to cover the deficit.

    Given the low probability that tax cuts will go hand in hand with spending cuts, tax reform that focuses on roughly revenue neutral simplification would likely be more pro-growth than reform focused on rate reduction.”

    Reply
    • kluelis

       /  3rd January 2019

      Your article is too short and far too simplified. I think a 50 page explanation with 100 graphs would give more credence to this pre school level analysis. Shame on you.

      Reply
  9. The Consultant

     /  3rd January 2019

    While it is technically true…

    I’ll go with “technically true” for $US 3.422 trillion in FY 2019, Merv!

    … by more meaningful metrics…

    Otherwise known as Fun With Statistics.

    … we estimate…

    Specifically Our Fun With Statistics.

    As I said earlier, this argument – underneath all the sophistry chosen over “technically true” – is that tax revenues would be higher had tax rates stayed the same, which completely ignores the reaction that workers and companies have to tax rates and the amount of tax they pay, and the resulting effects on GDP growth, employment growth (rather than the spurious nonsense of “population growth”), and wage growth.

    What “structural elements of the tax code, and other factors.. actually means is not explained, and even if it was, they’re fudge factors made up by people waging war against “technically true”.

    Tellingly they could make the same arguments against the Reagan and Bush tax cuts. And they did. And they lost then too.

    The GOP has won on tax cuts. The Democrats have won on spending increases.

    Given the low probability that tax cuts will go hand in hand with spending cuts…

    Oh I don’t think anybody in the US who proposed tax cuts in the last forty years has had any expectation that they would lead to spending cuts.

    Incidently that was the reason that good old “Extremist, Far Right, Nutcase GOPer Barry Goldwater, voted against the JFK/LBJ tax cuts – an argument used by the Democrats to this day as an example of how sensible and prudent the GOP used to be. He was not satisified that they’d be matched by spending cuts. As it happens LBJ did get the budget under $100 billion (Heh!) by an amount that was not accounting trickery. But even that was at the insistence of the Democrat Chair of the Senate Finance Committee, who insisted on it before he’d back the tax cuts. Oh for such Democrats again. And spending blew out just a few years later anyway under the twin impacts of The Great Society and Vietnam.

    By the early 1980’s the GOP realised that the whole “don’t cut taxes unless you cut spending” riff was a suckers ploy from the Democrats. Spending was never going to be cut again – ever. Something like 80% of it is effectively on automatic anyhow, and the discretionary part, even that which is truly discretionary, is falling every decade. So fuck ’em: cut taxes and let the chips fall. Taxpayers will have to cover the resulting debt you say? We’ll see how that goes at crunch time.

    … tax reform that focuses on roughly revenue neutral simplification would likely be more pro-growth…

    Yeah, yeah. Heard that from Roger Douglas when GST was introduced at 10% and the highest income tax rate was cut to 33%, and I accepted it. But the latter was pushed back to 39% by Cullen, cut by National to 33, but we’ll almost certainly see it increased again in the near future to pay for all the vital government spending. Of course. And we have the deliberately ignored bracket creep that pushes the real income tax rates higher every year.

    Naturally I’m hearing about “revenue neutral” again as CGT is discussed (5% in 2021 – 15% in 2030?), just as I heard it when Bill English pushed GST from 12.5% to 15%.

    Reply
    • Alan Wilkinson

       /  3rd January 2019

      Why on earth should tax revenue be a constant proportion of GDP? That simply assumes tax rates can never be cut and government can never be made more efficient relative to the economy. Talk about assuming what you want to prove.

      Reply
      • Blazer

         /  3rd January 2019

        think about it tax take was 20% of GDP ..which was 200 billion..=40billion..it would increase and decrease according to that measure.

        You may well ask why should inflation targets be set!

        Reply

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