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Takeaway: Domestic economic growth continues to slow on a trending basis, effectively threatening the consensus 2016 recovery narrative.

2016 U.S. Consumer Recession?

I’m off today flying back to Seattle to spend five days with my family. While our profession + modern technology = you’re never truly offline, I generally try to shut it down this weekend given that I don’t see them very often. That said, however, I can’t help but smell the stench of this morning’s #GrowthSlowing data from 35,000 feet in the air.

The most important U.S. economic data release we’ve received in 4Q15-to-date came out this morning in the form of Personal Income & Spending data for the month of OCT. From the prospective of our rate-of-change framework, the key takeaways from the release are two-fold:

  1. Real Personal Consumption Expenditures – which account for 69% of GDP – decelerated a fair amount, settling at +2.7% YoY from +3.1% in SEP. Real household consumption growth is now decelerating on a sequential, trending and quarterly average basis.
  2. Real Disposable Personal Income held flat at a healthy +3.9% YoY, but the +30bps sequential uptick in the Household Savings Rate to 5.6% caused growth in the headline consumption figures to decay.

Can’t Sneak #GrowthSlowing Past the Goalie - REAL PCE

Can’t Sneak #GrowthSlowing Past the Goalie - REAL INCOME

Can’t Sneak #GrowthSlowing Past the Goalie - PERSONAL SAVINGS RATE

Point #2 above corroborates the trending deceleration we’ve seen in consumer confidence, as most recently highlighted by this morning’s University of Michigan reading for the month of NOV, as well as the Conference Board reading which was released yesterday morning. True to its volatile form, the former index showed sequential strength in NOV, while the latter plunged and is now decelerating on a sequential, trending and quarterly average basis.

Can’t Sneak #GrowthSlowing Past the Goalie - UMich CONSUMER CONFIDENCE

Can’t Sneak #GrowthSlowing Past the Goalie - CONSUMER CONFIDENCE

While the aforementioned volatility in the UMich index makes the data set less substantially predictive of forecasting recessions, the somewhat linear nature of the Conference Board index makes it one of the key indicators for timing peaks in the economic cycle.

Can’t Sneak #GrowthSlowing Past the Goalie - CONSUMER CONFIDENCE CYCLE

With consumer confidence slowing in conjunction with dramatically steepening base effects for Real PCE growth and sharply receding base effects for Headline CPI, the most likely scenario with respect to domestic economic growth is that the U.S. consumer continues to decelerate – perhaps meaningfully – from here.

Specifically, the next four quarters of compares for Real PCE growth are the toughest since the four-quarters ending in 3Q08 and the next four quarters of compares for CPI are the easiest since the four quarters ended in 4Q11. It’s worth noting that Real PCE growth decelerated sharply from +2.7% YoY in AUG ’07 to -1.2% in SEP ’08 and Headline CPI recorded a massive acceleration from +1.1% YoY in NOV ’10 to +3.9% in SEP ’11.

Can’t Sneak #GrowthSlowing Past the Goalie - Real PCE Comps Chart

Can’t Sneak #GrowthSlowing Past the Goalie - CPI COMPS

While we’re not anticipating a similar crash in household consumption or a commensurate rip in CPI, we do think the principles of differential calculus are in our favor with respect to our anticipation of an outcome that is decidedly worse for Real GDP growth over the intermediate term (i.e. growth in the key driver “C” slows, while the GDP deflator accelerates). In a meeting yesterday, a very astute client summarized our analysis perhaps better than we could have:

“… If you’re saying Real PCE growth slows to 1% annual growth over the next 6-9 months, the U.S. economy could indeed experience a technical recession with the S&P 500 down -20% on that.”

Bingo. Why would you care to make it any more complicated than that?


Not All Is Bad, However

Since we are data nerds, however, we do care to sweat the small stuff. In the week-to-date, there has indeed been a few data points that have made us less right on our cyclical outlook for the U.S. economy, at the margins:

  • Growth in the New Orders components of Durable Goods and Core Capital Goods ticked up in OCT. Despite this, both series are still contracting on a YoY basis – effectively implying a continuation of the domestic industrial recession as most recently highlighted by the NOV Markit Manufacturing PMI reading;
  • The YoY growth rate of the 4-week rolling average of NSA Initial Jobless Claims decelerated to -8.2% YoY from -6.5% prior, which implies continued improvement in the domestic labor market; and
  • Corroborating continued improvement in the domestic labor market were the sequential upticks in the Markit Services and Composite PMI readings for the month of NOV given that SMEs account for 98% of total U.S. employment.

Can’t Sneak #GrowthSlowing Past the Goalie - DURABLE GOODS

Can’t Sneak #GrowthSlowing Past the Goalie - CAPITAL GOODS

Can’t Sneak #GrowthSlowing Past the Goalie - MARKIT MANUFACTURING PMI

Can’t Sneak #GrowthSlowing Past the Goalie - MARKIT SERVICES PMI

Can’t Sneak #GrowthSlowing Past the Goalie - MARKIT COMPOSITE PMI

Can’t Sneak #GrowthSlowing Past the Goalie - U.S. Employment by Firm Size

All that being said, the 2016 outlook for a recovery in domestic economic growth largely hinges on continued strength in household consumption. To the extent Consensus Macro is wrong on its outlook for the U.S. consumer, you can expect negative revisions to both top-down GDP and bottom-up EPS estimates for 2016E.

For our latest thoughts on why a U.S. (and potentially global) recession is likely to commence in 2016, please review the following presentations and research notes:

Enjoy your Thanksgiving weekend with your respective families!


Darius Dale