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The Hill

The one metric that matters when predicting a recession

By April 18, 2023No Comments

(This column originally appeared in The Hill)

Every day I get bombarded with economic information from well-meaning economists who are trying to predict whether or not a recession is coming.

There’s housing prices and construction data. There’s inflation and interest rates. There’s consumer confidence and small-business optimism. Is the national debt too high? Are the markets too low? Is GDP slowing? Is unemployment growing? There are countless economic metrics that individually could mean something yet collectively only add to the confusion. No one seems to know if the country is heading into a recession or, if it is, whether it will be mild or severe.

And yet it’s an issue that’s of core concern to most businesses in this country. Investment, hiring, spending and management decisions need to be made based on where the economy is heading. A wrong bet can be costly, even fatal for some businesses.

So how do we figure this out?

I don’t think that predicting a recession is as hard as it appears to be. Here’s what I’ve learned in 25 years of running a business: Everything in this world is simply about supply and demand. True, we had a very unusual supply problem post-pandemic. But that’s behind us. This potential recession, like most others, is generally about demand. When demand falls, everything falls along with it.

It doesn’t matter if businesses are selling to other businesses, because all products and services ultimately wind up in the hands of the consumer. That means it’s not just demand that matters, it’s consumer demand. And the key is tracking the trends. So, let’s look at the trends of some of the most important consumer items to see where demand is heading.

On the plus side, after hitting a bottom in January, sales of existing homestrended up in February. The same holds true for new home sales. It’s only a month, but that’s encouraging. Also encouraging is the number of people flying in the U.S., which is now about at pre-pandemic levels and growing.

Unfortunately, most other consumer-driven demand is tapering.

Vehicle sales have fallen each month in the first three months of this year. The same goes for orders of durable goods, which are long-term consumer items like appliances, furniture and electronics. Retail sales plateaued in January and advance retail sales are heading down. Restaurant sales have been dropping each month this winter and are now 6.5 percent off their December levels. And the delinquency rates on credit cards have risen significantly over the past year.

Although demand for these key consumer items is trending down, it’s important to note that the level of vehicles, durable goods, retail and restaurant sales are all higher than they were compared to the same period last year. And this isn’t an inflation thing in all cases. For example, there were 14.007 million vehicles sold in March of 2022 and 15.299 vehicles sold in March 2023, a 9.2 percent increase year over year.

Sales have generally been good over the past year — better than the previous year for most. That’s great news. However, and like the data is showing, sales have been softening over the past few months. Orders are trending lower. Pipelines are less active. That’s not so great.

Business managers look at revenues first, profits next. When revenues slow, all else slows. Revenues are driven by demand. The increases in home sales and travelers, though encouraging, aren’t strong enough to offset the fall-offs in the other important categories. Putting all other metrics aside, it seems clear that the demand for goods is generally trending down.

So yes, it appears we’re headed toward a recession, and very soon. If you’re running a business, you should plan on that.

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