Recession: Is the sure thing for sure, Part 2?!?
Over recent months we have been discussing the possibility that the consensus belief of an imminent recession may be premature. At the core of this position has been the observation that conditions appear to be more akin to that of the pre-2000 market era than that of the post-2000 era. The post-2000 era has relied on Central Bank stimulus to support “unsettled” economic conditions due to a litany of challenges ranging from the dot.com period to the “Great Recession” and book-ended by the COVID surprise. But the challenges now faced appear to be two-sided between weakness and strength. For now, the focus is on walking a tightrope to cool economic strength without pushing into recessionary conditions. Godspeed central bankers…
Today’s recessionary concerns have been focused on inflationary pressures not seen for some time. This, and the Central Banks’ history of overshooting their management of monetary policy gives good reason to consider if inflation can be tamed without a significant correction in the capital markets. Using the Consumer Price Index (CPI) as one measure of inflation, we see on the accompanying chart that CPI remains at levels well above those of the post-2000 era, and even going those going back to the mid-1980s, although it has begun to recede.
To translate how this risk might be further examined, we turn to the popular economic gauges from the Institute for Supply Management (ISM) to consider how inflationary environments have impacted manufacturing and employment. The ISM Manufacturing Purchasing Managers Index and the ISM Manufacturing Report on Business Employment. (Each of these are “diffusion indexes” which represent expansion when above 50 and contraction when under 50). The pink-shaded areas denote formally declared recessions going back over 75 years.
So back to the question: Is a recession imminent for the U.S.? This is where the economist says, “A recession is imminent, unless it’s not.” But CIOs and Portfolio Managers aren’t afforded that luxury and a prevailing view is needed. Looking at this chart, the following observations stand out:
- CPI (i.e., inflation gauge) is clearly receding.
- Manufacturing has now modestly moved below 50.
- This suggests a modest pullback environment.
- Employment is hovering around the baseline.
- It remains to be seen if the employment glass is half-full or half-empty.
But most instructive is that not all periods during which these gauges declined below 50 coincide with official recessions (which are formally dated after the fact). And there is a common condition coinciding with these periods: Employment. History says that employment will deteriorate not just below the neutral 50 level, but eventually decline well below the neutral 50 reading during a recession. As of the last report, the ISM Manufacturing Report on Business Employment continues to hover at neutral level. Could it decline further? We won’t predict the outcome, but recent news of layoffs have occurred during a period that many employers are trying, but struggling, to add additional employees.
Employment = Income. Income = Spending. Spending = Demand. Demand = Supply. Supply = Employment.
Maybe this is the virtuous cycle that can combat the recessionary impulse???
JAMES FERRIN
Chief Investment Officer
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