The business cycle bears took another hit yesterday. Home prices rose at a 10.9% annual pace in the March update of the 20-city composite of the S&P/Case-Shiller Home Price Index. That’s the fastest rate of increase in seven years. Meanwhile, consumer confidence rose to a five-year high this month, the Conference Board reports. Two data points alone are suspect, but looking at yesterday’s numbers in context with a broader review of economic and financial indicators suggests once again that the economy will continue to expand at a modest rate for the foreseeable future.
Were you expecting a recession? That’s been the forecast from a handful of analysts for some time. But the latest reports throw cold water (again) on the idea that the economy is succumbing to the darker angels of the business cycle. There’s no law that says recessions can’t begin when housing prices are rising in excess of 10% a year, but it’s unlikely. When the main source of wealth on household balance sheets is climbing at a healthy pace, that’s usually a big positive for the economy.
But there’s always reason to wonder if this time is different. There are worries, for instance, that the current rebound in housing carries the seeds of its own destruction. Some observers warn that we’re in a housing bubble, and one that’s driven largely by speculative institutional buying. Perhaps, but a housing market that’s rebounding strongly for the “wrong” reasons is still a significant plus for the macro outlook.
The idea that the economy isn’t sinking may come as a shock to some folks, but it’s really the same old story. Growth is still modest overall, but a broad cross section of indicators has routinely reflected low recession risk, as the latest economic profile of the US economy shows.
The mistake that some folks make is focusing on a handful of data points and assuming that the latest wobbly numbers tells us all that we need to know for analyzing the business cycle. Tempting as tunnel visions can be at times, it’s worth remembering that there’s always a weak number or two in our midst. But as the last several years shows rather persuasively, concentrating your analytical gaze on the data du jour is apt to mislead you about the primary trend. The only solution is to regularly review a carefully selected diversified mix of indicators, primarily on a year-over-year basis to sift out the short-term noise. This approach may not attract a crowd on TV, but as a robust measure of what’s really going on in the business cycle it’s a relatively reliable bit of intelligence.
But doesn’t that advice mean that we should look skeptically at yesterday’s upbeat news on housing prices and consumer confidence? Absolutely. But we should also consider how those numbers compare with the overall trend, as tracked by the Economic Trend and Momentum indices, for instance. You might also look to other business cycle measures, such as the Chicago Fed National Activity Index. By those standards, yesterday’s news strengthens the view that recession risk remains low.
Yes, there’s a caveat: the low risk is based on the numbers in hand. Tomorrow may tell us otherwise. But the message for the moment remains rather convincing, at least for those of us who aren’t predisposed to see trouble at every turn.