by Calculated Risk on 4/07/2025 10:04:00 AM
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.
Over the weekend, Goldman Sachs economists put out a note: Countdown to Recession
“If most of the April 9 tariffs do take effect, then the effective tariff rate will rise by an estimated 20pp once those increases and likely sectoral tariffs take effect, even allowing for some country-specific agreements at a later date. If so, we expect to change our forecast to a recession.”
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 uses new home sales, single family housing starts and residential investment. (I prefer single family starts to total starts). The purpose of this graph is to show that these three indicators generally reach peaks and troughs together. Note that Residential Investment is quarterly and single-family starts and new home sales are monthly.
Click on graph for larger image.
The arrows point to some of the earlier peaks and troughs for these three measures – and the most recent peak.
New home sales peaked in 2020 as pandemic buying soared. Then new home sales and single-family starts turned down in 2021, but that was partly due to the huge surge in sales during the pandemic. In 2022, both new home sales and single-family starts turned down in response to higher mortgage rates.
This decline in residential investment would typically have suggested that a recession was coming, however I looked past the pandemic distortions and correctly predicted no recession! The low level of existing home inventory led me to predict that new home sales would pick up – and that happened. This is a reminder that we can’t be a slave to any model.
This second 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 down 4% 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. he dashed line is the March 2025 seasonally adjusted annual sales rate (SAAR) of 403 thousand. Note: “Heavy trucks – trucks more than 14,000 pounds gross vehicle weight.”
Heavy truck sales were at 403 thousand SAAR in March, down from 436 thousand in February, and down 12.1% from 459 thousand SAAR in February 2025.
Usually, heavy truck sales decline sharply prior to a recession. Perhaps heavy truck sales will be revised up, but sales in March were somewhat weak.
On the other hand, light vehicle sales were strong in March.
Light vehicle sales surged to 17.77 million SAAR in March, up 11.0% from February, and up 13.3% from March 2024 as some buyers rushed to beat the tariffs.
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 rule was triggered in 2024 (slightly), but Dr. Claudia Sahm said at the time:
“I am not concerned that, at this moment, we are in a recession,” she told Fortune … “This time really could be different,” Sahm said. “[The Sahm Rule] may not tell us what it’s told us in the past, because of these swings from labor shortages, with people dropping out of the labor force, to now having immigrants coming lately. That all can show up in changes in the unemployment rate, which is the core of the Sahm Rule.”
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 new administration.
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