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Where’s The Recession, You Ask? Reprise

The narrative is that the “soft patch”, now so evident in U.S. data, is temporary, related to factors like weather, the government shut-down, and/or trade/tariffs. The Atlanta Fed, where GDP forecasts always seem to come out on the high side, put Q1’s real GDP growth at just +0.3%. And, the N.Y. Fed’s model says +0.9%. In any case, even the most ardent bulls have at least recognized that current data is rather weak.

Rest of the World

Let’s remember that because of globalism, there is no such thing as the U.S. decoupling from the rest of the world. So, the continued softening of the data from abroad should continue to be of concern. In fact, that data has softened to such an extent that the European Central Bank (ECB) has now reinstituted their low rate bank lending program (a money printing scheme and boon to Europe’s weak banking sector) after lowering their 2019 economic growth and inflation forecasts. The Bank of Canada (BOC), in its latest press release, acknowledged the worldwide economic slowdown: “…recent data suggest that the slowdown in the global economy has been more pronounce and widespread.” The U.S. stock market had a negative reaction to those announcements, now focusing on the reasons why central bank easing is back in vogue instead of the glee that usually occurs when liquidity spigots get turned on. With interest rates appearing to have peaked at the lowest level in modern history, the world seems to be mimicking the Japanese experience of the last 30 years, i.e., low inflation, low growth, record low interest rates.

Let’s look at some of the latest foreign data:

  • Chinese exports plunged in February, down 20.7% from a year earlier. Exports to their major trading partners were -28.6% U.S., -13.2% EU, -26.5% Honk Kong, and -9.5% Japan. You can’t blame all of this on tariffs. Imports were also down (-5.2% Y/Y). Anecdotal data indicates that layoffs in China have also spiked. And bad debt and bond defaults have risen to concerning levels. That makes the official 6% GDP forecast somewhat of a joke. Some analysts believe that China is already in recession.
  • In Germany, factory orders were down -2.6% in January (M/M) and -3.9% from year earlier levels.
  • Standard and Poor’s put a “negative” outlook on Mexico’s sovereign credit rating.
  • There was contraction in the manufacturing sectors of South Korea and Taiwan.
  • Now that some central banks have actually begun to ease (ECB and Bank of Japan (BOJ)) and all of the others are talking dovish, the dollar is going to get even stronger as the U.S. Fed, while talking dovish, is still actually tightening (via Quantitative Tightening (QT)). A stronger dollar puts downward pressure on exports as their translation into other currencies makes them more expensive.

Latest U.S. Data

In the U.S., the latest data continues to surprise to the downside.

  • Citi’s USA Surprise Index, which measures the difference between the median Bloomberg consensus estimate and the actual data, was at -43 the first week of March (and that was before the big miss on February’s headline employment report (actual 20,000 vs. consensus 180,000)).
  • Consumer spending continues to contract as seen in auto sales, down to 16.6 million units (annual rate) in both January and February, from17.5 million units last fall.

And the volatility in the employment report, itself, for the past two months leaves one wondering if any of this data is to be believed.

  • In January, the headline making Establishment Survey (where large businesses are surveyed) came in at a whopping 311,000 (current estimate after February revisions), while the February survey showed a paltry 20,000 net new jobs. That was a big market disappointment.
  • In the companion Household Survey (where individual households are queried), January showed a loss of -251,000 jobs, while February showed +255,000. In both months, the surveys told us opposite trends – go figure! Taken over the two months, however, both surveys do indicate slowing in the labor markets.

There was some good news.

  • Housing starts rebounded nicely.
  • And wages rose more than expected.

But, that’s about it. Regarding the housing number, starts are notoriously volatile, especially when winter weather isn’t near its historical averages. February’s wages came in at a +3.4% growth rate from year earlier levels, the fastest growth in 10 years. But, the factory workweek shrank by -0.25% and the total private sector workweek by -0.3% (equivalent to a 370,000 net job loss). Changes in hours worked are one of the Conference Board’s leading economic indicators, portending weaker future data releases.

Worse for investors.

  • In an era where there is downward pressure on prices due to demographics, technology, and globalism, rising wage rates put downward pressure on profit margins, and that likely means falling analyst profit estimates going forward.
  • Only 11% of U.S. GDP comes from exports, but 43.6% of S&P 500 sales are foreign. That means downward pressure on top line revenues going forward. So, the slowdown in the world’s economies should give investors pause.
  • Consumer revolving debt has slowed markedly, another indication of flagging demand. And, in Q4, household new worth came down by $3.73 billion (3.5%) due mainly to Q4’s stock market downdraft. Perhaps that explains January’s weak retail sales print.


You may not believe that recession is the base case scenario, but, since there are clearly heightened signs of weakening economic conditions both abroad and at home, managing risk means adjusting investment portfolios in line with rising equity market risk.

Robert Barone, Ph.D. is a Georgetown educated economist. He is a financial advisor at Fieldstone Financial. www.FieldstoneFinancial.com.

He is nationally known for his writings and Robert’s storied career includes his having served as a Professor of Finance, a community bank CEO and a Director and Chairman of the Federal Home Loan Bank of San Francisco. Robert is currently a Director of CSAA Insurance Company (a AAA company) where he chairs the Finance and Investment Committee. Robert leads the investment governance program at Fieldstone Financial, is the head of Fieldstone Research www.FieldstoneResearch.com, and is co-portfolio manager of the Fieldstone UVA Unconstrained Medium-Term Fixed Income ETF (FFIU).


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