The US Economy Appears To Be Marching Towards A Mid-2020 Recession (1/10/2020)
The reason we sound so “bearish” regarding our expectation for Quad 4 in 2Q20E despite the forecasted GROWTH delta having such a low conditional probability is because we still have a view that recession risk has not fully abated. Moreover, our deep-dive analysis on the history of US recessions reminds us that recessions have overwhelmingly tended to begin with a “Quad 3 to Quad 3” sequence and culminate in a “4th Quartile Delta Quad 4”. Yes, a large delta into Quad 4 is not what we currently have projected, but a recession would obviously change that in real-time.
Per yesterday’s Deloitte’s Q4 CFO Survey, 97% of US CFOs believe a slowdown has already begun or will commence in 2020. 82% of respondents anticipate taking more defensive actions, like reducing discretionary spending and headcount, as a way to stave off the looming headwinds.
This morning’s DEC Jobs Report – which was doubly presaged by Initial Jobless Claims throughout the month and Wednesday’s weak ADP Employment Report – reads as such:
- Nonfarm Payrolls: -6bps to 1.40% YoY – the slowest RoC since SEP ’17
- Initial Jobless Claims: +943bps to 5.93% YoY – the fastest RoC since SEP ’17
- ADP Payrolls: -4bps to 1.53% YoY – the slowest RoC since FEB ’11
- Private Sector Wages: -36bps to 3.03% YoY – the slowest RoC since SEP ’18
- Aggregate Hours Worked: -35bps to 0.81% YoY – the slowest RoC since JUL ’10
- Aggregate Labor Income: -63bps to 3.71% YoY – the slowest RoC since JAN ’17
- U6-U3 Spread (proxy for labor market slack): -20bps to 320bps wide – tightest spread since AUG ’01
These data are reflective of what we’re seeing in survey-based data as well. I can’t stress enough how powerful of a signal the recent breakdown in the NFIB Job Openings Hard To Fill Index is with respect to signaling a recession in the coming 2-3 quarters. Its hit rate is a perfect 100% since its inception.
All told, we all know that buybacks grind to a halt and 401(k)/IRA flows turn negative during recessions. As such, it’s important that investors are aware the probability of a recession commencing in mid-2020 continues to increase per several key indicators of the health of the labor market. Cyclically oriented sectors and style factors across equities and fixed income might like Fed #cowbell for now given the current conditional factoring setup, but that could quickly turn south once markets begin to look ahead to the second quarter.
What’s Driving The Gap Between Us And Consensus On Q4 GDP? (1/10/2020)
The primary factor driving the divergence between our model and the Atlanta Fed’s implied Quad 2 nowcast is how both models are scoring deterioration (us)/improvement (them) in trade. With respect to how our model is designed to interpret signals from trade, the YoY RoC of Imports is positively correlated to the YoY RoC of Real GDP growth on a first difference basis (i.e. IM ↓; GDP ↓), while the YoY RoC of the Trade Balance is negatively corelated to GDP on the same basis (NX ↑; GDP ↓).
Their model is more than likely the “improvement” in the trade balance as extremely positive from a C+I+G+NX perspective, while our model is implicitly scoring that that as a slowdown in the YoY growth rates of inventory accumulation and/or consumption – the both of which are tracking down sequentially Q4-to-date:
- Trade Balance: +250bps to 19.7% YoY – the fastest RoC since MAR ’16
- Wholesale Inventories: -50bps to 3.3% YoY – the slowest RoC since DEC ’17; the quarterly average growth rate of 3.48% YoY is tracking down -240bps in Q4
- Real PCE: the quarterly average growth rate of 2.39% YoY is tracking down -17bps in Q4
- Headline Retail Sales: the quarterly average growth rate of 3.25% YoY is tracking down -71bps in Q4
- Retail Sales Control Group: the quarterly average growth rate of 3.59% YoY is tracking down -114bps in Q4
All told, the US has been and remains a consumption economy post the Great Soybean Deal of 2019. Something as trivial as one-off trade distortions might fluff the Q4 number that’ll be reported on 1/30, but I’m guessing the bond market will continue to look through any such noise on the headline figure and right to fresh cycle-lows in the growth rates of the BEA’s various measures of domestic demand.