by Calculated Risk on 6/09/2025 01:49:00 PM
Early in February, I expressed my “increasing concern” about the negative economic impact of “executive / fiscal policy errors”, however, I concluded that post by noting that I was not currently on recession watch.
Last month Warren Buffett said:
“We should be looking to trade with the rest of the world, and we should do what we do best, and they should do what they do best … Trade should not be a weapon.”
In the short term, it is mostly trade policy that will negatively impact the economy. However, there other aspects of policy that bear watching.
Here is some of the data I’m watching.
Housing: Housing is the basis of one of my favorite models for business cycle forecasting.
This graph shows the YoY change in New Home Sales from the Census Bureau. Currently new home sales (based on 3-month average of NSA data) are up 3% year-over-year.Usually when the YoY change in New Home Sales falls about 20%, a recession will follow. An exception for this data series was the mid ’60s when the Vietnam buildup kept the economy out of recession. Another exception was in late 2021 – we saw a significant YoY decline in new home sales related to the pandemic and the surge in new home sales in the second half of 2020. I ignored that downturn as a pandemic distortion. Also note that the sharp decline in 2010 was related to the housing tax credit policy in 2009 – and was just a continuation of the housing bust.
The YoY change in new home sales in late 2022 and early 2023 suggested a possible recession. But as I noted earlier, I was able to look past the pandemic distortion and was able to predict a pickup in new home sales due to the low level of existing home inventory and because homebuilders could offer mortgage incentives that would somewhat offset the sharp increase in mortgage rates.
There are no special circumstances now, and if this measure falls to off 20% a recession seems likely.
Yield Curve: The yield curve is a commonly used leading indicator. I dismissed it when the yield curve inverted in 2019 and again in 2022. Both times dismissing the yield curve was correct (the recession in 2020 was obviously due to the pandemic, so we will never know if the yield curve failed to predict a recession in 2019).
Here is a graph of 10-Year Treasury Constant Maturity Minus 2-Year Treasury Constant Maturity from FRED since 1976.
Heavy Truck (and Vehicle Sales): Another indicator I like to use is heavy truck sales. This graph shows heavy truck sales since 1967 using data from the BEA. The dashed line is the May 2025 seasonally adjusted annual sales rate (SAAR). Note: “Heavy trucks – trucks more than 14,000 pounds gross vehicle weight.”
Heavy truck sales were at 446 thousand SAAR in May, down from 457 thousand in April, and down 7.9% from 484 thousand SAAR in May 2024.
Usually, heavy truck sales decline sharply prior to a recession and sales were OK in May.
And light vehicle sales were ok in May after surging in March and April as buyers rushed to beat the tariffs.
Light vehicle sales in May (15.65 million SAAR) were down 9.4% from April, and down 1.1% from May 2024.
Unemployment: Two other concurrent indicators are the unemployment rate (using the “Sahm Rule”) and weekly unemployment claims.
Here is a graph of the Sahm rule from FRED since 1959.
The Sahm Rule was at 0.27 in May.
And weekly unemployment claims always rise sharply at the beginning of a recession (other events – like hurricane Katrina – can cause a temporary spike in weekly claims).
As I noted earlier, I’m not sure how to estimate the economic damage caused by these tariffs. And they might just go away (no one knows). There are also boycotts of U.S. goods and less international tourism based on both the tariffs and the inflammatory rhetoric of the current administration.
