Forget oil futures and gold prices. The real sign of economic trouble comes when Americans stop buying boats, some experts say.
While most eyes of late have been on the housing crisis and a shrinking dollar, a number of economists have been watching more offbeat metrics like boat sales, bar tabs and restaurant bills.
These lesser-known leading indicators are all in decline, the experts say, though most add the signals aren’t yet strong enough to indicate recession.
“Boats are the most discretionary purchase that any person makes,” says Roger Kubarych, chief U.S. economist for Unicredit HVB, Europe’s second largest bank. “That’s true for big boats and small boats. Almost no one needs them, except fishermen, and we have very few of those left.”
So boat sales are a powerful indicator, he says. “But they aren’t signaling recession yet.”
Thom Dammrich, president of the National Marine Manufacturers Association, isn’t so sure.
His group’s figures show that boat sales fell 6 percent last year and are down another 10 percent so far this year. That covers everything from $3,000 sailboats to multi-million-dollar mega yachts. “It crosses people in all economic strata,” Dammrich says.
His conclusion: “A lot of things are pointing to an economic downturn, certainly boat sales.” Boat sales are a leading indicator when the economy is headed into recession and a lagging indicator when the economy is rebounding, Dammrich says.
The sales numbers for liquor are a lot stronger than boats. And on the subject of booze, David Ozgo, chief economist of the Distilled Spirits Council, wants to dispel a widely held myth.
“People often make the mistake of thinking that alcohol is recession proof,” he tells Newsmax. “We have the same ups and downs as everyone else. While liquor sales aren’t nearly as cyclical as autos, homes or other big ticket items, typically in a recession, we see liquor sales go down.”
The growth of liquor sales has tapered off this year, but that deceleration is “consistent with an economic slowdown rather than a recession,” Ozgo says. Liquor sales rose just under 4 percent last year, Ozgo says.
Through the first nine months of this year, that sales growth slipped to just 2 percent. With the strength of holiday sales, Ozgo projects the growth rate will end up about one percentage point below last year.
As for dining out, like boat sales it constitutes discretionary spending, so experts say it represents a potent economic indicator.
“The index we watch, real (or inflation-adjusted) industry sales just went negative in September, down 0.6 percent,” says Ron Paul, president of Technomic, a restaurant consulting firm. “That’s the first time that’s happened since 2005. But one month doesn’t constitute a recession. If we get three to four months of declines in a row, that would indicate a recession.”
He also noted that restaurant employment in the U.S. rose 3.7 percent in the 12 months ended in September, so the industry is sending out mixed economic signals.
The National Bureau of Economic Research, the official arbiter of when recessions occur, defines recession as broad-based weakness for a period of time in employment, consumer spending, production and sales.
“The weakness so far isn’t broad, and outside of housing, we haven’t seen weakness for a long enough period to constitute recession,” Michael Sheldon, who focuses more on mainstream data as chief investment strategist of Spencer Clarke, a New York securities firm tells Newsmax.
Obviously economists look at more than booze, boats and restaurants to divine economic trends. Paul Kasriel, chief economist of Northern Trust bank, who sees recession coming within a year, focuses on a combination of two measures that he calls the Kasriel Recession Warning Indicator.
First is the yield spread between federal funds, the rate banks charge each other for overnight loans, and the 10-year Treasury note. Normally the Fed funds rate is higher than the Treasury yield. But as of Thursday, the Fed funds rate was 4.75 percent, and the 10-year Treasury rate was 4.34 percent. When the spread is negative, like now, half of Kasriel’s indicator is pointing to recession.
The other half is the real monetary base, which consists of currency in circulation and reserves created for the banking system by the Federal Reserve, both adjusted for inflation. When the year-on-year percentage change in that base is negative -- it contracted 0.2 percent in the third quarter from a year earlier -- the second half of Kasriel’s recession requirement is met.
“There have been a negative yield spread and a contraction in the year-over-year monetary base for the first three quarters of the year, sending out a recessionary signal,” Kasriel says. “The indicator has predicted or coincided with all six recessions since 1967.” (See sidebar below.)
He sees recession starting as early as this quarter and if not, then in the first half of next year. The indicator points to a mild recession, but Kasriel foresees a worse recession than the last one, which occurred in 2001, because of all the excesses in the economy built up by falling interest rates during 2001-2004.
Still, Kasriel is in the minority. In a Wall Street Journal survey of 60 economists early this month, they pegged the probability of recession within the next 12 months at 34 percent on average, down from 36 percent in September.
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