Consumer Sentiment Suggests a 2022 Recession

Two economists have introduced a new leading indicator, which predicts a recession soon. These Excel charts illustrate their insight. If they're correct, Excel users will be very busy in the months ahead.

2727
Download the example workbook.

Two economists have introduced a new leading indicator, which predicts a recession soon. These Excel charts illustrate their insight. If they're correct, Excel users will be very busy in the months ahead.In recent months, business websites have speculated about recessions and stagflation in 2022.

These predictions could affect your Excel work significantly in the next few months. I’ll soon explain why.

One prediction was offered by David Branchflower of Dartmouth College and Alex Bryson of the University College London. Branchflower explained their prediction in a web conference posted on YouTube.

Branchflower’s insight was that the trends in surveys of consumer sentiment are a leading economic indicator. This is true for the United States and the OECD countries.

The reason this measure works so well, Branchflower said, is that surveys of consumer sentiment are essentially a measure of each respondent’s fear of unemployment. And it turns out, he said, that all those individual concerns, taken together, provide a more accurate picture of our economic direction than can the entire economic profession.

This Excel chart of consumer sentiment and the unemployment rate—both in the context of the recent US recessions—illustrates his point with regard to the unemployment rate:

Two economists have introduced a new leading indicator, which predicts a recession soon. These Excel charts illustrate their insight. If they're correct, Excel users will be very busy in the months ahead.

The blue line shows consumer sentiment in the US, as determined by the University of Michigan’s monthly survey. Branchflower relies on a survey by the Conference Board, which shows a very similar pattern.

The orange line shows the US unemployment rate one year ahead. So, for example, its peak shown for 1991 actually occurred in 1992. And the orange spike shown for 2019 actually occurred in 2020, at the beginning of the short Covid recession.

When we compare these two lines, we can see that as the blue line rises—that is, as consumers become more optimistic about their jobs—the orange line falls. That is, the unemployment rate falls about one year later.

Conversely, as consumer sentiment falls, unemployment rises about one year later.

This relationship is particularly important in the United States because there’s a strong relationship between rising unemployment and recessions.

The following version of the chart applies a 13-month centered moving average to the data for the blue line. This transformation makes the inverse relationship between the two lines much clearer. By using this smoothing method, however, the last 6-month trend for the blue line always will be revised as more months pass.

Two economists have introduced a new leading indicator, which predicts a recession soon. These Excel charts illustrate their insight. If they're correct, Excel users will be very busy in the months ahead.

When I looked at this chart, I wondered how the negative correlation of the two lines varies as we shift the unemployment rate ahead by less than 12 months. I found that the differences in correlation between a shift of any number of months between 6 and 12 are insignificant.

So if Branchflower is correct, the US unemployment rate could start to rise in the next few months. And a recession could begin soon after that.

On the other hand, because Covid has distorted economic relationships significantly in the last two years, anything is possible.

You can download the workbook here.

The Implications for Excel Users in Business

The Start of US Recessions vs the Date the NBER Called ItThis table shows the starting date of the last six US recessions, the date when the the National Bureau of Economic Research (NBER) announced that starting date, and the number of months that elapsed between the beginning of the recession and the date that the NBER officially called the recession.

The average of those Elapsed Months is more than seven months.

Therefore, the next time a recession begins, your managers won’t know it for about seven months on average. Instead, when sales fall, they’ll blame Covid, or regional problems, or bad strategies, and so on. And during those months, your forecasts and analyses could incorrectly assume that there are better times ahead—and they’ll start any day now.

And that means that during those months, your managers will postpone actions that they would have taken if they had known they were already in a recession.

If Branchflower is correct about his prediction of rising unemployment rates, the next recession could be a bad one. This is because the US will have two other significant problems to face.

The first problem is inflation. Many companies will find that their costs are rising faster than their prices. And your company could be one of them. What should your managers do? Excel users probably will play a large part in finding those answers.

The second problem is even worse. There’s the serious danger that both the Fed and Congress could blunder terribly in the months ahead—just as they did in the 1930s during the Great Depression.

Nearly any action they take to fight the after-effects of the Covid recession, or the next recession, will make inflation worse. Perhaps much worse.

And any action they take to fight inflation could make the next recession worse. Perhaps much worse.

The only good news in the challenging economic environment that we could face over the next few years is that productive Excel users should be in great demand. Only you, an Excel user, will have the tools, the professional knowledge, and the company knowledge to help your managers find the best path possible around the economic dangers ahead…

…while you also get your normal Excel scutwork done.

In short, as an Excel user, it’s time to prepare for your important and challenging work ahead.

You’re going to be needed.

You can download the workbook here.