Listen to Your Refrigerator

(originally posted on July 11, 2010)

People often ask me whether the recession is over and where the economy is headed next.  I usually tell them about something I tell my classes: one way to gauge where the economy is headed is to listen to your refrigerator.  This is not to say that the ColdSpot in your kitchen is like a crystal ball that can predict the economic future; but, the way you feel when you hear the noises it makes may provide some insight into whether the US economy is growing or shrinking.

A refrigerator is a complex arrangement of motors, fans, belts, thermostats, and fluid-filled hoses.  Each of these contraptions may make a variety of odd noises as it starts, stops, and runs—like when the icemaker empties and refills its trays.  We often become accustomed to these many sounds, but feel a sense of alarm if we hear something out of the ordinary as we explore the kitchen in search of a late night snack.

It is our response to these noises that gives us clues to the economy’s direction.  When we hear a noise indicating that a major appliance, like our refrigerator, may be in need of repair or replacement we may react in a couple of different ways.  If we are confident about our economic prospects for the near future, we might say something like “The fridge is making an odd noise. I’d better replace it before it stops working.”  On the other hand, if we are fearful about our economic prospects, we might say something like “The fridge is making an odd noise. I can’t afford to replace it, so I hope it doesn’t stop working anytime soon.”

Spending on durable goods, like refrigerators, is a major part of our Gross Domestic Product (GDP).  Variation in durable goods spending is also a major contributor to economic fluctuations.  When the economy is strong, people replace durable goods before they break down and cause inconveniences in their lives.  When the economy is weaker, people are anxious about the future and hesitate to replace an item that is still operating until it actually breaks down.  So, spending on durable goods is strongly correlated with the level of confidence we have in our economic futures and is, therefore, a leading indicator of where the economy is headed.

So, where do I think the economy is headed now?  I decided to rent for awhile when I sold my last home so if the refrigerator goes on the fritz, it’s my landlord’s problem.  But, my nine year-old car recently produced a new rattle.  I’m not shopping for a new car.  I’m not even browsing the car section of eBay.  I do what a mechanic recommended several years ago—I just turn up the volume of the radio.