The Bureau of Labor Statistics released the latest numbers this past Friday, including a record breaking unemployment rate of 3.9%. Conservatives, supporters of the President, and Donald Trump himself have been running with this news and proclaiming that the economy is booming and it is because of Trump’s policies, but be cautious! A politician cannot claim credit for a booming economy, without taking blame for one that is tumbling.
What is happening is predictable. An economy sees tremendous gains due to the overall feelings of investors. In early 2017, investors were happy to hear about a cutback in regulations and the potential of lower income and corporate taxes. Trump can definitely point to his cuts in taxation and regulations; they have happened. The trouble comes when we look deeper into the economic data.
Consider this: In 2010 under President Barack Obama unemployment was at 9.8%. A few years later, in 2016, unemployment was down to 4.9%. Barack Obama was still President. The falling unemployment did not begin with Trump, so Trump cannot and should not take credit for it.
When President Trump was campaigning he told the truth, and said that BLS statistics were B.S. and that they do not reflect the real economy. Now that he is in office, he touts the same numbers he had refuted just a couple of years ago. Just one year ago the labor participation rate was 62.9%. According to the latest BLS data, today that number stands at 62.8%. Not exactly bragging rights.
If we look deeper into the numbers we’ll see that the numbers are in actuality not all that much better than they were a year ago. The biggest indicator of a prospering economy is the stock market, but even the NYSE is wavering. Each day is seeing either big gains or big losses. This is a sign of trouble ahead. The stock market is not confident, despite the record high numbers.
One of the great economic predictors is the yield curve. This chart shows how the interest rates of 3 month to 30 year treasury bonds respond to the free market. In ideal times, long term bonds such as the 10, 20, and 30 year bonds demand a higher interest rate than short term bonds. This would should a yield curve that is positive. From left to right, the curve goes up.
When investors are increasingly insecure about economic outlook, they tend to value short term bonds almost as much as long term bonds. The yield curve begins to flatten. When investors become VERY skeptical about the economic outlook, they tend to demand short term bonds at higher interest rates than long term bonds. This means that a flattening of the yield curve is a warning sign, and the inverting of the yield curve is a “DO NOT ENTER” sign.
These charts have a history of predicting recessions. Back in the year 2000, the yield curve flattened, and then inverted.
In the year 2007, it again flattened and inverted…
And today, we are seeing a similar picture, with the yield curve flattening out…
Using the yield curve as a predictor for how well the economy is performing has been reliable in the past. The troublesome thing is that with the unemployment rate going down, the Federal Reserve is more likely to raise the interest rate on short term bonds. As the interest rate on short term bonds continues to rise, but the long term rate remains stagnant, the yield curve flattens and it only further predicts a recession in the next 6 months to two years.
When the recession hits, politicians need to be gear up to shift blame away from themselves to their opponents. This will be especially hard for Republicans considering their hold of the House, Senate, and Presidency. Depending on when this recession begins, it could mean a single term for Donald Trump, or the welcoming in of a socialist Democrat in 2024. Be ready!