In the ever-evolving landscape of economic analysis, one recent development stands out – a significant slowdown in US economic activity, as indicated by a major economic measure. The ISM New Orders Index, a crucial predictor of economic trends, has plunged to its lowest level in over a year. This sharp decline suggests that what appeared to be the beginning of an economic recovery in 2023 might now be reversing, with potentially significant downside momentum reminiscent of the downturns in 2008 and 2001. Both of these instances ended in a recession. Is that what’s in store for the economy today? That’s exactly what this article dives into.
Public Perception about Recession
Interestingly, about 50% of Americans believe the US is already in a recession. While many news outlets dismiss these concerns as misinformed, the new data might somewhat validate these fears. The latest figures suggest that the US economy could be on the verge of a recession, aligning public sentiment with economic reality.
The Role of GDP in Defining Recessions
At the heart of economic analysis lies GDP, the primary measure of economic activity. During periods of normal expansion, GDP growth ranges between 2% and 4%, indicating a healthy economy. In contrast, during recessions, GDP growth declines to zero or even turns negative, reflecting economic contractions.
Currently, GDP growth is around 3%, a robust rate typically associated with economic expansions. However, the ISM New Orders Index serves as an early warning system, often indicating economic contraction before GDP figures catch up. This was evident before the 2001 recession and the 2008 financial crisis, where the index provided a preemptive signal of downturns.
Predicting Economic Trends with the ISM New Orders Index
The ISM New Orders Index is not only useful for predicting contractions but also for forecasting recoveries. It tends to rebound ahead of GDP growth, offering a glimpse into future economic stability. Recently, the index showed a resurgence, leading many to believe that GDP would remain stable. However, the current downturn in the index is causing widespread concern.
The Impact of Rising Interest Rates
The US economy has not yet fully felt the impact of rising interest rates from the past couple of years. Interest rates are a critical factor in economic health, predicting economic trends about 18 months in advance. By analyzing interest rates alongside the ISM New Orders Index, we can anticipate continued economic weakening until mid-2025.
Best and Worst Case Scenarios
In the best-case scenario, the US economy continues to struggle at current levels until June 2025. However, we believe the more likely outcome is a significant economic weakening over the next year, potentially leading to a full-blown recession.
ISM New Orders Dip: What It Means for the Stock Market
Given these economic indicators, what does this mean for the stock market? Despite the ISM New Orders Index being at relatively low levels throughout 2023 and 2024, the stock market has seen substantial gains. This is because the indicator has not yet reached recession levels seen in previous downturns. For example, in 1995, the ISM New Orders Index was at similar levels to today, and the S&P 500 continued rising for four years. If this scenario repeats, we could see a prolonged bull market.
However, we do not expect this optimistic outcome. We anticipate the ISM New Orders Index will dip below recession thresholds, similar to the downturns of 2001, 2008, and 2020, leading to significant market declines.
The Role of Small Businesses
One of the reasons for our recession outlook is the behavior of small businesses. Over the past year, small businesses have been hiring fewer people and considering layoffs – typical precursors to economic downturns. Despite this trend, the economy has not yet entered a full-blown recession, indicating that these changes take time to manifest fully.
Conclusion: Navigating Market Uncertainties
Our analysis suggests that by the end of the year, the US economy is likely to enter a recession. Our trading strategy has been to take advantage of the strong market through the end of 2023 and into 2024. As long as a recession does not materialize, we find ourselves in an environment similar to 1995-1996, where the stock market experienced a significant surge.
However, given the current economic indicators, particularly the ISM New Orders Index and rising interest rates, we advise investors to remain cautious. Understanding these economic measures and their implications can help navigate the uncertainties ahead. Click here to sign up! Subscribe to our YouTube channel and Follow us on Twitter for more updates!
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