A Recession By Any Other Name

The Real Estate Espresso Podcast

A Recession By Any Other Name

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A Recession By Any Other Name

Welcome to The Real Estate Espresso Podcast, your morning shot of what’s new in the world of real estate investing. I’m your host, Victor Menasce.

On today’s show, we’re talking about the process by which economic numbers are reported and what it actually means.

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On today’s show, we are talking about the process by which the economic numbers are recorded by the Bureau of Labor and Statistics and the Bureau of Economic Analysis.

Many in the mainstream media are speculating about the chances of the U.S. economy entering a recession later this year. Well, on today’s show, I’m going to make the case that the U.S. economy is already in recession and has been for some time. I’m going to further make the case that what’s coming later this year is an even deeper recession.

Now as you’re listening to this, you might be thinking, oh come on Victor, the Bureau of Economic Analysis is responsible for making the determination whether the economy’s in recession or not, and so far they have not produced any data to support your claim.

Well, I’ll be the first to acknowledge that fact. We had a revision of the second and third quarter employment data from the Bureau of Labor and Statistics, which showed a reduction in hiring in each of the six months in the second and third quarters of last year.

Now you might be thinking falling employment numbers for six months is not enough by itself to justify calling it recession. But you have to remember that the Bureau of Economic Analysis will now take those revised employment figures and plug them into their economic model to remove the income and consumer spending that would have been imputed to all that hiring that didn’t actually happen. The GDP numbers are going to get revised downwards.

But there is a time lag between the employment numbers and the revised GDP numbers. In fact, major revisions to the numbers can take several months and sometimes up to a year. That’s a lag between the employment numbers and GDP being revised.

Now we don’t yet have the revisions for the fourth quarter employment numbers. The other thing to remember is that the employment report has two parts: the employer survey, or what’s sometimes called the establishment survey, and the household survey. These should match, and they don’t. The discrepancy is over two hundred and fifty thousand jobs for the month of April.

Now let me share two more data points. In all six of the last times when oil prices increased by fifty percent or more, the result was a recession. All of them, no exception. Well, here we go again. Now if someone were to tell me that this time is different, I would not buy it.

Next let’s look at consumer credit. We would acknowledge that the market downturn that started in 2008 was pretty severe. In fact, it was so severe the word “recession” seemed too weak. The comparisons to 1929 and the start of the Great Depression were definitely being made at the time. But it seemed premature to call it a depression, maybe a little too dramatic in the early years of that downturn. So the term Great Financial Crisis took hold and that’s what stuck in the cultural vernacular.

So let’s look at consumer credit compared with the bottom of the downturn that started in 2008. In fact, let’s look at automotive. During the Great Financial Crisis, auto loan delinquencies rose to around four and a half percent overall, with subprime auto loans peaking at about 5% delinquency.

At the end of 2023 about 5.2 percent of U.S. auto loans were at least 90 days overdue, well above the long-term average of about 3.6 percent in the past decade. The 60-plus day delinquency rate overall was around 1.6%, but for subprime borrowers it was as high as 6.8 percent. These delinquency rates are elevated compared to the past decade, especially in the subprime segments.

Now in comparison, the current rate shows overall auto loan delinquency above 5%, which is higher than the crisis era. Subprime auto loans today have delinquency rates near 7 percent, far surpassing the levels seen in 2008. In short, current auto loan stress, especially in subprime, is exceeding what we saw back then.

In fact, the average monthly payment for an auto loan in the United States is $767. That is a huge number. When you layer on top of that rising fuel costs, rising insurance, maintenance costs, it’s easy to see how transportation costs are now on par with many people’s rent.

Now we don’t have banks failing like we did in 2008, so it seems like everything must be just fine. But you can’t have falling employment, rising oil prices, and record-setting default rates for automotive debt and claim that the economy is doing just fine. Yeah, these default rates are an all-time record.

So I’m not here saying definitively that the economy is in recession. What I’m asking is, what are the chances that all of these economic indicators add up to the picture of a growing economy? If that’s true, then I might need more sophisticated math than addition and subtraction, because the numbers simply don’t add up.

All of these can only mean one thing, and that’s recession.

As you think about that, have an awesome rest of your day. Go make some great things happen, and we’ll talk again tomorrow.

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