Stocks have had a strong start to the year and many experts are hopeful that the economy will land softly and avoid a recession.
There is a sense of optimism in the air. Stocks have had a strong start to the year and many experts are hopeful that the economy will land softly and avoid a recession.
The data looks relatively good which has caused a change in tone. Inflation is decreasing while the unemployment rate remains low. This is what policy makers would hope to see.
There are some less encouraging signs, however, and the big question is whether the slowdown suggested by some measures will help cool down inflation without leading to a full-blown recession.
There are a few things to keep an eye out for.
There have been a number of business surveys indicating weakness or outright pessimism. For example, the Empire Fed’s most recent survey for January fell to -32.9, one of the worst readings outside of the pandemic collapse. This could translate into lower hiring or lower capital expenditure, but that risk exists.
There are a number of labor market indicators that suggest a slowdown is underway. The unemployment rate, while still near historic lows, has begun to tick up in recent months. Additionally, job growth has slowed and wages have stagnated. While the labor market remains strong overall, these trends suggest that a slowdown may be on the horizon.
In a note published earlier this month, Macquarie Capital Markets economists David Doyle and Neil Shankar observed that the latest Non-Farm Payrolls report indicated a second straight month of contraction in aggregate hours worked. While just a couple of months of shrinkage might not seem like a massive worry just yet, Doyle and Shankar point out that this two-month streak has happened only three other times since 2006.
Other indicators of labor market softening are more prosaic, but are worth watching. Job openings are sliding, both in the official numbers and in the privately collected numbers. Nick Bunker of the job listings website Indeed posted their latest openings tracker, which is based on postings to their site. As you can see below, there's been an unambiguous slowdown.
The hard economic data has held up well, but there are some warning signs emanating from the consumer. Retail sales have contracted for two months in a row, with the December ‘control’ group (which excludes things like auto dealers and gas stations) having fallen by 0.7% sequentially.
There are other ways to measure the health of the consumer, and one that is popping up more frequently has to do with soaring credit card borrowing. While delinquencies remain low, overall balances on credit cards have shot up, which might suggest that consumers are having to borrow more to pay their bills or fund their purchases.
Although initial jobless claims have remained relatively low, there has been an increase in the number of layoffs being reported in the news. This is not just limited to a few large companies, but seems to be happening across the board. According to Bloomberg's Chief Economist for Financial Products, Michael McDonough, the number of mentions of 'job cuts' in company transcripts has been increasing steadily.
There are two things of note in this chart. The level of corporate downsizing chatter remains low even by the standards of the 2010s. What's also interesting is that small spikes in the past haven't really translated into a significant increase in Initial Jobless Claims (the red line in the chart). That means the current situation - where there's lots of talk about layoffs but few new jobless claims in the data - is not that unusual.
The Conference Board's Index of Leading Indicators (LEI) showed a sharp decline of 0.7% in December, and the year-on-year reading is now down 7.4%. This is the lowest year-on-year reading since the Covid lockdowns and the financial crisis, according to analysts at Bespoke Investment Group.
Bespoke reports that, since 1960, there has never been a time when the year-on-year reading was as low or lower than it is now and the economy wasn’t in a recession. There were also two other periods where the economy had a recession, and the year-on-year change wasn’t even as negative as it is now.
Not everyone agrees with the usefulness of the leading economic indicators (LEI), which includes a number of economic indicators such as the S&P 500, jobless claims, new manufacturing orders, the yield curve, and so on. According to Neil Dutta of Renaissance Macro, "The leading indicators are a composite of indicators that have been released throughout the month. Thus, once the index is released, it is already stale news."
As the US economy continues to show signs of slowing down, many are wondering if a recession is on the horizon. In a new paper, Federal Reserve economists take a closer look at what's been dubbed the "vibecession" of tumbling economic indicators. Neil Dutta and Conor Sen discuss the findings and the chances of a US soft landing.
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