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Key Indicators Have Peaked; Markets Hope for Soft Landing

The National Bureau of Economic Research (NBER), a private sector company, is the entity responsible for officially labeling recession start and end dates. As a rule of thumb, the financial markets use two consecutive quarters of negative GDP growth as the marker. But, that is not the way the NBER sees it. According to their website, the NBER defines a recession as:

“a significant decline in economic activity … lasting more than a few months, normally visible in real GDP, real income, employment, industrial production, and wholesale-retail sales. … The committee places particular emphasis on … (1) personal income less transfer payments in real terms… (2) employment… (3) industrial production and (4) the volume of sales of the manufacturing and wholesale-retail sectors adjusted for price changes.”

Item (1), personal income (excluding transfers), appears to have peaked in December; Item (2) employment, at least according to the Household Survey, has fallen so far this year (-187k), and aggregate hours worked also looks to have put in a top. In addition the Establishment Survey (headline jobs number) disappointed in February and May. Item (3), Industrial Production, has been falling all year. And wholesale and retail sales (4) have been toppy, especially big-ticket items like autos and appliances. April and May did see a rebound in U.S. consumption although year/year growth is still anemic (1.4%).

Because the “significant decline in economic activity” must last “more than a few months,” and the peaks noted above appear to have been recent, it is likely that, if, indeed a business recession did start in Q2, it will be quite some time before the NBER stamps it. It took them a year (December ’08) to officially mark the start of the last recession (December ’07).

The Current Situation

  • The expansion is now the longest on record, but end of cycle indicators are appearing;
  • At least three of NBER’s four key indicators appear to have recently peaked;
  • Other key data are almost all negative, especially from other industrial countries;
  • Business sentiment indicators also appear to have rolled over;
  • The bond market, usually the most reliable and accurate indicator of underlying economic strength, is now flashing red, as free market driven long-term interest rates have fallen precipitously, and there is yield curve inversion (long-term rates lower than short-term ones as the 10-year T-Note yield is lower than the Fed Funds rate), nearly always an indicator of an approaching recession.


The latest Investors’ Intelligence Poll shows the following:

  • Bulls: 48.1% (up from 42.7%)
  • Bears: 18.3% (down from 18.5%)

It is clear that the equity markets expect a “soft landing” and for the expansion to continue.

Business leaders, on the other hand, appear to have a different view as data from the Business Roundtable Survey indicates that business confidence is at the lowest level since late 2016. Duke University’s survey of CFOs indicate that 69% believe that a recession will start by 2020, while the National Association of Business Economists’ survey pegs the odds of a recession in 2020 at 60%.

The equity markets clearly believe that the Fed will soon lower its administered short-term Fed Funds rate, and that will be enough to engineer a soft-landing, avoid a recession, and set the economy up for a continuation of the expansion. As I have indicated many times in the past, the Fed’s track record in this regard is dismal.

The Data- the Good News

  • Retail sales did rise 0.5% in May, and April’s initial -0.2% estimate was revised up to +0.3%. This is good news, as the consumer appears to be alive and well. Year over year data do indicate a paltry +1.4% rise, but at the margin (last two months), things appear to be on the uptake. Most of the negative news is in the business sector and housing.

The Data – the Other News

  • Morgan Stanley’s Business Conditions Index fell 32 points to 13 (from 45) in June, the largest one-month fall on record, and the lowest level of the index since 12/08;
  • JPM’s Global Manufacturing Index has been in a downtrend for 13 months and Citigroup’s Economic Surprise Index (a measure of actual vs. consensus estimates) has been negative for 306 trading days, the longest on record, and longer than in the ‘07-’09 recession;
  • Employment: In the Household Survey (HS), employment data is down -187k jobs through May, and full-time employment is off -83k. The HS printed negative employment numbers in three of the first five months this year. The Establishment Survey (headline jobs numbers)(ES) disappointed in both February and May despite the BLS’s automatic plug number near 100k/month (the “Birth/Death Model” for small un-surveyed business). Jobless claims, both initial and continuing, are now rising. The Challenger Survey of layoffs indicates that job cuts are up 86% YTD with more than -21k job cuts in the auto industry, the largest number since ’09, and rising layoffs in the retail sector;
  • Production in May, while up slightly from April, at 109.6 is below December’s 110.5; Capacity Utilization peaked in November; housing continues to struggle despite falling mortgage rates with depressed sales of new and existing homes and falling rents now evident in the formerly hot markets;
  • University of Michigan’s Consumer Sentiment Index fell to 97.9 in June, vs. 100.0 in May;
  • Inflation: Rising prices are almost nowhere to be found, an indication of economic weakness:
    • May CPI (both headline and core): +0.1%;
    • Cyclically sensitive core goods prices: -0.1%, negative four months in a row and down -0.2% from a year earlier;
    • The University of Michigan’s median 5-10 year inflation expectation gauge dropped to a low of 2.2% in June, the lowest in the 40 year history of the survey;
    • Both import prices (-0.3% May; -1.5% year/year) and export prices (-0.2% May; -0.7% year/year) are falling;
    • Port traffic: Long Beach/LA: Inbound -6.3%; Outbound -7.4% (both year/year);
    • Aggregate hours worked, a key employment measure, appears to have peaked in Q1. Historically, this measure has peaked between 0 and 5 months prior to each of the last seven recessions;
  • Oil Inventories in the U.S. are rising (+2.2 million bbls week of June 10), and the prices of oil have fallen 12% in the past month despite OPEC’s supply constraints, Venezuela and Libya’s production issues, and Iran sanctions. The prices of other key commodities (Copper, Iron Ore) have also been falling, a sign of flagging industrial needs;
  • Chinese Industrial Output: May +5.0% year/year. In March, this was +8.5%. That implies a contraction in the double digit (>10%) range for April and May;
  • Chinese Auto Sales: -16% year/year, the 11th consecutive months of contraction;
  • Euro area Industrial Production fell -0.5% in March (-0.4% year/year);
  • Weakness is showing up in Australia and New Zealand’s data. These are the usual suppliers of commodities to the rest of the world, especially China.


The NBER is not going to opine as to whether or not a recession is already in progress or is about to start until it is sure that the peaks in the data we have seen recently are, indeed, cycle peaks. This may take up to a year. The data however continue to decelerate (China) or have been in outright decline. Consumer sentiment fell slightly in June, but is still positive (due, in part, to high flying equity markets), but key business sentiment indexes have now rolled over. Weakness is appearing in the business sector (Corporate and CFO sentiment indexes, falling Industrial Production, falling capex, stagnant housing). The U.S. consumer appears okay, for now. Other industrial countries, however, appear to have already entered recessions, including China and Europe. The stock market continues to hover near peaks based on the hope that the Fed can engineer a soft landing, and that a trade deal with China will reverse all the key data series. Generally speaking, hope is not a good investment strategy.


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