Bob’s Journal for 4/18

Advance Indicators of Recessions Reverse Course

The most-cited advance indicators of recessions recently became less gloomy after months of indicating a recession was imminent.

The prominent Leading Economic Index from The Conference Board declined for 23 consecutive months, causing The Conference Board to warn for most of the last two years that a mild recession was likely. The anticipated starting date for the recession slipped from late 2023 to early 2024 and then late 2024.

But the February index (released in late March) rose by 0.1%, and The Conference Board said it no longer warns of a near-term recession. Instead, we should expect “headwinds to growth.”

Another prominent recession indicator is the yield curve. The curve’s been inverted (short-term interest rates were higher than longer-term rates) since about mid-2022.

Historically, that’s happened shortly before a recession more than 90% of the time.

The yield curve is still inverted, but not by much.

Prognosticators who rely on only one or two indicators, especially these indicators, have said for many months that a recession was around the corner.

I follow a range of indicators that have solid histories of anticipating recessions in advance, often months ahead of time. I often update the status of these reliable indicators in my semiannual Economic and Investment Review that’s part of the Spotlight Series of online seminars.

These advance recession indicators have been hovering around the levels at which they anticipate a recession but haven’t issued clear warnings. For some time, I’ve concluded that the indicators were near tipping points but weren’t pointing to a recession.

For example, a recession is likely on the way when the current unemployment rate is rising and above its 12-month average.

The current rate has been bouncing above and below the 12-month average for many months. But the current rate has been relatively flat and hasn’t held above the 12-month average for a sustained period.

The experience of the last two years shows the importance of searching history for the most reliable indicators and using multiple data points to guide decisions instead of using only one or two indicators.

Don’t Roll Over RMDs to Other Retirement Accounts

Some retirees continue to make a key mistake with required minimum distributions (RMDs), and that could cost them a lot of money.

When a retiree doesn’t need the RMD to pay living expenses, some move the money to a Roth IRA. They treat it as a conversion of the RMD amount to a Roth IRA. Others try to rollover the money to a different IRA or qualified retirement plan.

Neither action is allowed.

Once a person has to take RMDs, the first distribution from a traditional IRA during the year is considered to be the RMD until the RMD amount has been distributed.

The RMD amount has to be distributed from the traditional IRA and included in gross income. Only after the RMD is satisfied can any additional amounts left in the traditional IRA be converted to a Roth IRA.

It is possible to take the RMD and then contribute that amount to a Roth IRA, after including the RMD in gross income.

There’s no age limit for making contributions to either a Roth or traditional IRA.

But you must meet the IRA contribution requirements because you’ll be making a regular IRA contribution, not a rollover.

To make a contribution, you must have earned income for the year at least equal to the amount you contribute to the Roth IRA. Only employment and self-employment income are earned income. Investment income and other passive income aren’t earned income.

In addition, taxpayers with modified adjusted gross incomes (MAGI) above certain levels can’t make Roth IRA contributions or can contribute only a reduced amount.

For single taxpayers, in 2024 the maximum Roth IRA contribution amount begins to be reduced when MAGI is $146,000 and is eliminated when MAGI reaches $161,000. For married couples filing jointly, the contribution limit begins to be reduced when MAGI reaches $230,000 and is $0 when MAGI hits $240,000. The MAGI limits are indexed for inflation each year.

If you don’t meet those two tests, you’ll be making an “excess contribution” to the IRA and will owe a penalty for each year the excess amount stays in the IRA.

The Expense That’s Covertly Boosting Inflation

A major expense of many retirees and pre-retirees has been increasing rapidly, but it isn’t included in the Consumer Price Index (CPI) and doesn’t affect reported inflation.

In Bob’s Journal of October 26, 2023, I explained how auto insurance increased rapidly. That substantially increased the cost of owning and operating vehicles and contributed to a higher CPI.

While auto insurance is included in the CPI, homeowner’s insurance is not.

Homeowners insurance premiums increased rapidly the last few years and increased your personal inflation rate above the reported CPI.

After rising about 20% over 2022 and 2023, homeowner’s insurance is estimated to increase another 6% in 2024. Bloomberg Intelligence estimates that the cost of insuring a home increased about 50% from 2019 to 2023.

Renter’s insurance is included in the CPI but hasn’t increased as much as homeowner’s insurance.

Premiums for homeowner’s insurance increased primarily because of the increased damages from weather events in recent years. The number of costly weather events in the last few years seems to be higher than anticipated.

And the cost of repairing the damage from those events as well as from routine home catastrophes increased because of general inflation.

Though homeowners in the directly affected areas bear a large portion of the increases, insurers tend to spread some of the costs among policyholders around the country.

In some areas of the country, insuring a home has become prohibitively expensive for some homeowners, and a number of insurers have withdrawn from some markets.

Before moving in retirement, be sure to check on the cost and availability of homeowner’s insurance. When reviewing your retirement plan, check that estimates of future costs of insuring the home are reasonable.

The Data

Retail sales jumped higher again in March, rising 0.7% after increasing 0.9% in February.

There was a 1.1% increase in core retail sales in March, which excludes food services, auto dealers, building materials stores, and gasoline stations.

The Consumer Sentiment Index from the University of Michigan declined during the first half of April to 77.9 from 79.4 at the end of March.

Consumers’ expectations fell a little, but assessments of current conditions declined sharply.

Consumers also increased their inflation expectations for both the next 12 months and five years.

The outlook of homebuilders was unchanged in April, according to the National Association of Home Builders (NAHB) Housing Market Index. The index was 51.0 in both April and March. That remains the highest level since July 2023.

Housing starts tumbled 14.7% in March after rising 12.7% in February. Starts declined significantly for both single-family homes and multi-family homes.

This is the biggest decline for starts since April 2020 and the lowest number of starts since August 2023.

Industrial production increased 0.4% in both March and February. Over 12 months, industrial production was unchanged through March after being down 0.3% through February.

Manufacturing production increased 0.5% in March following a 1.2% increase in February. Over 12 months, manufacturing production increased 0.8% through March and was down 0.5% through February.

The Empire State Manufacturing Index increased in April to negative 14.30 from negative 20.90 in March. A reading below 0.0 indicates the sector is contracting.

The Producer Price Index (PPI) rose 0.2% in March after rising 0.6% in February. Over 12 months, the PPI was up 2.1% through March and 1.6% through February.

The core PPI, which excludes food and energy costs, increased 0.2% in March and 0.3% in February. Over 12 months, the core PPI was up 2.4% through March and 2.1% through February.

New unemployment claims decreased by 11,000 to 222,000 in the latest week.

Continuing claims, which lag a week behind new claims, increased to 1.817 million from 1.789 million.

The Markets

The S&P 500 lost 3.03% for the week ended with Tuesday’s close. The Dow Jones Industrial Average fell 2.79%. The Russell 2000 declined 5.49%. The All-Country World Index (excluding U.S. stocks) retreated 4.25%. Emerging market equities decreased 4.93%.

Long-term treasuries lost 4.26% for the week. Investment-grade bonds declined 2.82%. Treasury Inflation-Protected Securities (TIPS) fell 1.42%. High-yield bonds decreased 1.92%.

The dollar rose 2.26%.

Energy-based commodities increased 0.09%. Broader-based commodities fell 0.24%. Gold gained 1.60%.

Bob’s News & Updates

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