The Oil Drum

Consumer confidence is key: There are several surveys of consumer confidence, and when they all turn down then usually we see a fall in consumer spending.

If consumer spending goes down, then we are in a recession. If consumer spending holds up or increases, then no recession. I hate to oversimplify, but it really is that simple.

Now variations in business spending (real investment in inventories and plant and equipment) do matter a lot because they fluctuate greatly. Changes in investment frequently trigger either recessions or booms. Note that new home construction is counted as investment; it is way down. Thus I do not look for a boom in investment spending to keep the economy going in the face of declining spending by consumers.

Last year I forecasted a recession in 2007; I might have been right then.

Note that government deficits are expansionary, but here it is change in the size of the deficit that has the most fiscal effect, and because the deficit is not increasing, I do not look for expansionary effects from fiscal policy this year.

So long as consumers keep charging more and more on their credit cards (and clearly, increases in credit-card debt cannot indefinitely outpace increases in nominal income in percentage terms) the economic expansion will continue. If consumers spend less, then yes, we are going to into a recession, and it could come quickly.