C&I lending is one of the most important indicators used to determine the health of the economy. I was questioning the importance I give this metric because it predicted a recession, yet nothing happened. With the report which was released Friday, the C&I lending had a sharp move higher, passing the previous peak in November. This signals the economy is strong. It removes fears of a recession. The previous analysis I did was that either a recession was coming this year, or the indicator is broken. The longer it stayed below the November, peak the stronger the indicator got. There have been several periods where the indicator fell for a few weeks, but 6 months was an unusually long period. This latest report makes me think a recession in 2017 is highly unlikely.

Just because a recession isn’t in the cards doesn’t mean the economy will reach the growth rates seen in previous cycles. In the 1990s growth cycle there were 0 quarters with below 2% real GDP growth. In the 2000s cycle, there were 5 quarters with below 2% growth. In this cycle, there have been 16 quarters of below 2% growth.

As you can see in the chart below, the GDP Now report is showing 2.7% growth for Q2 which is down from the 2.9% growth rate seen in the previous update. The estimate fell because of the advanced inventories report and the international trade report. The NY Fed model sees 1.91% growth. This means it has only moved 0.05% in the past 3 weeks making this a more stable period than any other one in the prior 2 quarters. There are only 4 more weeks until the advanced Q2 report I released which means the range between the NY and Atlanta Fed forecast is likely to be where the GDP growth rate falls.

As I have said in previous posts, the risk of reflexivity is an important concern for the economy as a stock market crash could hurt the economy. The VIX is the exact opposite of what it proposes to be. While a high VIX is supposed to mean high risk and a low VIX is supposed to be low risk, the reality is the opposite. At market peaks, the VIX is low and at bottoms it’s high. As you can see from the chart below, the 12-month rolling average of the VIX is near an all-time low. This doesn’t mean the stock market is at a top, but it does mean the VIX will likely go higher from here. That’s a dangerous position to be in.