What recession? These 3 charts throw cold water on the idea that the next economic meltdown is near
- Experts across Wall Street have been sounding the alarm on an imminent economic recession with increased regularity.
- Jim Paulsen, the chief investment officer at Leuthold Group, says fears are overblown and lays out three charts to support his contrarian view.
Calls for an economic recession have occurred with such regularity that, for many investors, the question is not if one will strike, but when.
Jim Paulsen, the chief investment officer at Leuthold Group, says this is fatalistic thinking that's not necessarily steeped in truth. Sure, multiple red flags have been raised in recent months, but he thinks they've been counterbalanced by forces of strength that have gone overlooked.
Paulsen is focused specifically on balance sheet strength for both households and businesses, as well as other signals of confidence. And while he's not naive enough to think that these are the only recession indicators worth watching, their uniform strength is enough to make him question the growing chorus of economic bears.
"Some signs now pointing more prominently to a recession include a calendar-old recovery, a flattish yield curve, and a U.S. leading economic indicator which peaked last September," Paulsen said. "However, private-sector balance sheets, often at the epicenter of most recessions, remain remarkably healthy."
Read more: Here's why the next recession could be unlike any the US has ever seen
But don't take Paulsen's word for it. Let the charts he made do the talking. Below are three that he highlighted in a recent report, each of which makes a separate argument suggesting that ongoing recessionary fears are overblown.
1) Balance sheet health
The chart below shows measures of balance sheet health for both the household (blue line) and business (red line) sectors. Past recessions are also signified by vertical gray shading.
As you can see, recessions have occurred after sharp spikes in these measures. And judging by that historical precedent, the economy doesn't look particularly at-risk right now.
Paulsen notes that the household balance sheet ratio has actually strengthened as the economic cycle has aged - the first time that's happened in the post-war era. Further, after an increase around 2015, the business balance sheet ratio has trended sideways ever since.
2) Private sector confidence
The chart below has a simple takeaway: Both US consumer and business confidence are still close to post-war highs. This is notable because these measures have historically faded ahead of past recessions.
Paulsen highlights the US Consumer Confidence Index specifically. The gauge is at 95.5 right now, and he says it's dropped below 80 before eight of the past nine recessions. Needless to say, it has a long way to go.
"While confidence can change quickly, outsized private sector cautiousness does not yet seem to be hampering the expansion," Paulsen said.
3) A proprietary private sector recession indicator
The chart below shows the combination of two proprietary measures tracked by Leuthold - one for households, and the other for businesses.
As you can see, the combined gauge is near its highest levels of the current recovery. Because of this, Paulsen stresses that the ongoing expansion is far from old. If anything, he thinks it's "middle-aged."
"The Private Sector Recession Indicator in this note has been improving the last few years, it is near its best level of the entire recovery and, if history is any guide, would need to decline substantially before recession risk increases meaningfully," Paulsen said.
He continued: "While the end of this economic expansion may be nearing, the healthy state of private sector balance sheets argues that investors may do best by betting against calls for an imminent recession."
