How We Know a Recession Isn't Imminent, in One Graph

NEW YORK (TheStreet) -- Household wealth matters -- for economies, and for societies. It's a key measure of a country's prosperity.

But it turns out it's also a darned good predictor of recessions.

Since the 1960s, every American recession has been preceded by a year-over-year decline in the real value of household assets. The Fed's Thursday release of fourth-quarter 2013 Flow of Funds data shows that no such decline is currently apparent. Quite the contrary: Household assets are still rising rapidly.

The picture has been similar for real household net worth -- assets minus liabilities -- they're also rising rapidly. (Okay, that's two graphs, but who's counting?)


Over more than 60 years, we haven't seen a recession when this household asset measure was anywhere near these levels.


There's only been one false positive in that period. Second quarter/third quarter 2011: A decline in real household assets without an ensuing recession. 

Many explanations for that anomaly would probably revolve around another unusual condition: Quantitative easing, and in particular the ending of QE2. The Fed announced when it started the program that it would end "by the end of the second quarter of 2011." And it did:

Weekly % change in Fed holdings of treasuries and mortgage-backed securities.

That explanation is somewhat unsatisfying, of course, because the big 16% decline in the S&P 500 (and household real assets) didn't happen until July/August of that year. If the end of QE2 was the explanation, why didn't the market price that in in advance?

So while many explanations are possible, that exception remains mysterious.

The 1950s and '60s also stand out. Recessions in that period were all preceded by declining growth in household real assets, but not actual declines in value. And there were two false positives, when the measure actually went (slightly) negative, but with no ensuing recession. I will leave it to my gentle readers to surmise why these times are different.

With household assets growing as they are now, a recession in the near future would be the blackest of swans -- a wildly improbable event based on more than 60 years of history.

Steve Roth an investor and serial entrepreneur in Seattle. He blogs at Asymptosis.com.

At the time of publication, the author held no positions in any of the stocks mentioned.

This article represents the opinion of a contributor and not necessarily that of TheStreet or its editorial staff.

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