Are we in a Recession or Heading for one?
Michael Spencer
A.I. Writer, researcher and curator - full-time Newsletter publication manager.
Thoughts on the Low Unemployment Recession
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2023 is going to be a storm for economic data
Hey Guys,
With the stock market bear market rally we've seen in the last six weeks, we're going to have to have a chat.
Global search for "Recession" is spiking in the summer of 2022. According to data from Google Trends.
MON AUGUST 15TH, 2022 MONTREAL CANADA
We have an inverted yield curve, but also, retail inventory data and housing data are both saying we are at the?beginning of a recession.
We also have a consumer sentiment issue around inflation that should impact future consumer behavior. Basically the lowest consumer sentiment, for many years.
Some of us forget what a recession looks like or feels like, we are in denial due to a labor shortage and so-called "record" low unemployment rates. Even with millions of people out of the labor force with long-covid (estimated to be 4 million in the U.S).
The National Association of Home Builders/Wells Fargo Housing Market Index dropped 6 points in August to 49. Anything below 50 is considered negative. If China is experiencing a full-blown real-estate debt crisis, housing is cooling in the U.S. which is usually an indicator we are entering a recession.
Then we have two straight quarters of economic contraction. So why are we in a recession?
Even if we have passed peak inflation with record low rates of unemployment, the economic headwinds for future guidance for 2023 are highly problematic.
But don’t listen to me, JP Morgan’s head said chances of a "harder recession" and of "something worse" at 20 to 30%. What is that something worse? With layoffs even companies like Microsoft, Google and Facebook are trimming positions and doubling down on “productivity”.
The impact of China, inventory surpluses, a cooling housing market and energy-price volatility means even the Fed’s interest rate hikes are unlikely to cool down inflation and core CPI very effectively.
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Even if the 2023 recession has unusual characteristics GDP contraction is more than likely to take place at the end of 2022 and perhaps heading into 2023 as well. The bear market rally we have seen in the stock market in July and the first half of August has been weirdly in a vortex of “bad news is good news” leading to sentiment rallies.
The problem is the data that’s coming is showing poorer guidance on both fronts, inflation and recession. Core CPI didn’t cool, energy prices where just a bit lower. Core inflation around rent increases will really squeeze American consumers. Wage growth isn’t accounting for these increases, even we have supposedly record unemployment.
So many of these things are lagging indicators. The National Association of Home Builders/Wells Fargo Housing Market Index dropped?6 points to 49?this month (August), its eighth straight monthly decline. Anything above 50 is considered positive.
Yield curve inversions?are viewed as a good recession predictor because it suggests that investors believe – with the interest rate on long-term bonds lower than the rate on short-term bonds – economic growth is slowing. So a lot of what you’d expect to be flashing red during a recession or that a recession is about to happen, are indeed warning us.
If you play the micro-cap stocks however during the bull market rally, you likely made some money. Huge whales were betting on BigTech again.?George Soros?is such an example. The bear market rally of July and August, or the last 6 weeks have been driven mostly by BigTech that have a significant place in moving the NASDAQ. Soros likes Amazon, Alphabet and Salesforce.
I’m getting ready to cover micro-cap stocks and disruptive companies like I like to do soon again for premium subscribers. Earning was much better than some feared, but the market multiples are now again no longer tied to fundamentals. That’s not when I like to get into a market.
According to NBER data, the average U.S. recession lasted about?17 months?in the period from 1854 to 2020. In the post-World War II period, from 1945 to 2020, the average recession lasted about 10 months. So this assumes that a 2023 recession might not actually last that long.
My approximate best guess is that this recession will begin in October, 2022 and last until about August, 2023. In that, things should get worse before they get better. Energy prices during the colder months could be far higher, which will make inflation very difficult to tame. High inflation can last a couple of years or longer, especially when the Fed has limited tools to deal with it.
China’s data is also worrying on the global economy. I don’t know why the West seems to downplay it. The real-estate crisis accounts for a majority of family savings in China, and at least 30% of their economy, far higher on the local government level. Youth unemployment is reaching rates that we haven’t seen before in China in quite some time.
China’s economy is definately slowing. So far as you can even trust their data, retail sales grew by 2.7% in July from a year ago, the National Bureau of Statistics said Monday. That’s well below the 5% growth forecast by a Reuters poll, and down from growth of 3.1% in?June.
China’s official manufacturing survey indicated activity contracted last month, raising fears that the economy’s recovery from widespread lockdowns in spring will be slower and bumpier than expected. Since B.A. 5 is in Japan and South Korea, it’s definately in China as well. Inflation aside, we’d still be struggling with guidance and the outlook. American BigTech are so well diversified and fortified in the Cloud, they won’t feel the pinch like others are already feeling.
In Earnings we learned:
Since so much of the data are lagging indicators, when we really know we’ll be in a recession it could be a bit intense.
All this talk of a brewing storm has come and gone, but the underlying data keeps getting worse even as the stock market is trying its best to ignore it or say that "bad news is good news". But is good news bad news with peaking inflation?
What do you think of this unique moment in the U.S. and global economy?
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2019 American Chemical Society Fellow
2 年Technically we have not seen two quarters of GDP contraction since the second quarter was slightly positive (but within the uncertainty for no or negative change) and first quarter numbers have been revised (as they often are) upward. Yield inversion is a good predictor of recession but it usually takes years to arrive.