Are Those Recessionary Winds or Just Hurricane Debby? – Top 3 Takeaways – August 5th, 2024
- So, about those recession winds... One week, four economic reports, two data bombs and a very real risk that the US economy entered a recession in July. Often when it comes to perception changing economic data there’s a drip, drip, drip effect that plays out. What happened last week was more like a hailstorm with each of the four key economic reports showing the size of the hail getting larger (or perhaps more appropriately since it is hurricane season, and the Big Bend is getting ready for Hurricane Debby to make landfall insert your hurricane related references here if you prefer). First, on Wednesday, there was the ADP Private Sector Jobs Report which showed job growth during July was way lower, at just 122,000 jobs added during the month, than Wall Street projections, and also way lower than the total needed to keep pace with population growth which is approximately 200,000 per month. But that wasn’t the only less than ideal news within the report. ADP also showed that the sparce hiring that was taking place was with larger sized companies. Small businesses, which are the best leading indicators from a labor perspective, actually shed jobs during the month. Then on Thursday we received the weekly unemployment filings, which is a report that usually isn’t worth paying much attention to, but that suddenly took on added significance fresh off of the ADP Report. And what did it say? Unemployment filings spiked during the week to the highest level in a year. But then there was the data bomb. The Manufacturing ISM report. As I noted on Friday when talking about the “winds of recession coming in hard” as a Wall Street economist was quoted as saying last Thursday... ISM manufacturing report tis a data bomb. The index, which measures manufacturing activity, came in with a read of 46.8, which is a recessionary number. How recessionary? The last time we had a monthly read this low, it was because of COVID lockdowns. The last time we weren’t in a pandemic and had a monthly manufacturing number this low, you’d have to go back to the Great Recession. It’s been nearly 15 years since we had a manufacturing number this low. Many economists have called for recessions over the past two years that haven’t materialized. Maybe this time will be more of the same...but what isn’t the same is the economic data. It’s suddenly weak, and in the case of manufacturing – historically weak. If the winds of recession are coming in hard, we’ll have a better idea of how hard at 8:30. So, uh yeah. About that Friday jobs report.
- The report didn’t represent say, hurricane force winds, but they were at least tropical depression sized winds with the potential for further development ahead. Not only did the government’s headline number of 117,000 new jobs mirror the weakness displayed in the ADP Report, another 29,000 jobs were wiped away through negative revisions to prior reports for a net number of only 88,000 jobs for the month. After reaching a low of 3.4% last year – the unemployment rate has steadily been rising this year with a surge in unemployment over the past two months to bring the rate up to 4.3%. When was the last time that unemployment was this high? October of 2021. What happened only two months later? A recession. The technical recession in the first half of 2022. As I mentioned to begin 2022... I began to voice my concerns about the overall economy not being so good in January. It’s not complicated, there’s only so long that inflation can run hotter than incomes before we, nor companies, can’t keep up anymore and that may have started to happen in January. And there was this from my March 11th Q&A: Most economists and analysts are wrong at key inflection points because they analyze data after its already happened as opposed to analyzing what’s happening right now but hasn’t been documented. You need look no further than the bad joke that inflation was to only be “transitory” all throughout last year as it rose ever higher. The Federal Reserve and economists only admitted it wasn’t after eight months of data and 40-year high inflation. By definition a recession is six consecutive months of an economic decline. That means it's not even possible to define a recession until we’ve already been in one for at least seven months. By then it's too late for people who needed to make adjustments in their lives, spending habits and investments to do so without suffering the consequences of being caught in the same cycle as everyone else. The reason I brought up the ‘r’ word, starting in January, and this is my best-case recession argument, comes down to these realities. Small businesses have fired more than they’ve hired in 2022. Wage growth has been 5.1% year over year. Inflation has been 7.9% year over year. The gap between income growth and inflation is widening. 75% of Americans are now adjusting consumer behavior due to gas/prices inflation. And that’s how I accurately predicted the technical first half 2022 recession. So let me update a few things here. Wage growth has been 3.6% year-over-year which with inflation pacing 3% over that time. So that places us in a better position than the comparisons to two and a half years ago. The average person isn’t currently falling behind due to inflation. The bigger problem is that the unemployment rate over that same time has risen by nearly a full point, or to put it another away...
- 1.5 million people needing work today compared to a year ago today, aren’t finding it. That’s the problem with jobs not growing fast enough to keep up with population growth. As I mentioned, just as was the case early in 2022 – small businesses most recently fired more people than they hired – so that’s similar. And what about consumer behavior, as consumers make up about 70% of the US economy? Most recently just over 70% of people have cut back on their spending – that's almost identical to what we saw to begin 2022. And speaking of 70%, what’s called the yield-curve indicator flashed an 70% chance of recession early last week – before all the economic data had come in. Based on what we’ve seen over the past week that’s probably about right. We appear to have had the economic equivalent of a tropical depression with a 70% chance of further development. The question now becomes whether this tops out as a tropical storm if it does develop, or whether it could become a hurricane. It’s too early to tell but the economic data are becoming awfully windy very quickly.