via UPFINA
There are many bearish investors claiming that the economy is already in a recession. They support this by claiming that the NBER is late to announcing recessions. They are correct. By the time almost every investor knows the economy is in a recession, it’s probably time to start buying not selling. The NBER usually doesn’t recognize recessions until most traders have already sold.
NBER About 1 Year Too Late
As you can see from the chart below, it took 366 days from the start of the last recession for the NBER to recognize it. If it wasn’t a long recession, it would have been over by then.
I still see people declaring this is the longest expansion on record. Probably true, but I seem to recall Yogi saying 'we won't know the cycle has turned until the cycle has turned.' pic.twitter.com/PhfHnrkAJS
— Not Jim Cramer (@Not_Jim_Cramer) October 4, 2019
The chart also shows that it takes a long time for announcements that an expansion started. There’s not a bullish or bearish bias here.
While the bears are correct not to trust the NBER with timing the stock market, they are incorrect in their premise that there is always a recession coming soon or that there is one ongoing when the cyclical data slows. That logic has been wrong for almost 10 years. Just because recession announcements are delayed and GDP can be adjusted lower, doesn’t mean you can throw out all the data and claim a recession is ongoing. The stock market, jobless claims, new home sales, existing home sales, and the unemployment rate don’t suggest a recession is here. GDP growth below 2% isn’t a recession since the Fed suggests the long run growth rate is near 2%.
Very Weak Business Confidence
One of the most bearish charts going around is CEO confidence. As you can see in the chart below, the CEO confidence index as measured by Conference Board is the lowest since Q4 2008 and its yearly growth rate is the lowest since Q2 1979.
Yikes! Yesterday’s Conference Board CEO confidence number was just plain ugly. Lowest reading since Q4 ’08 & YoY lowest since Q2 ’79. CEO confidence has never been this low outside of US recession. This is the chart you should be paying attention to today. Recession is knocking. pic.twitter.com/9f3o0jPIAL
— Julien Bittel, CFA (@BittelJulien) October 3, 2019
CEOs aren’t optimistic about the next 6 months for the economy. This survey is consistent with the relatively weak PMIs. The ISM manufacturing and non-manufacturing PMIs in September were consistent with 1.5% and 1.4% GDP growth. Growth is expected to be 1.7% in Q3, but keep in mind soft data is pushing estimates lower. The economy is in a cyclical slowdown, but CEO confidence is acting like it’s potentially in a recession.
This speaks to a point we made in a previous article. Goldman Sachs’ current activity indicator would show 0.4% growth if it only included survey data. It would have 2.5% growth if it only included hard data (it’s 1.3% overall). Growth is slowing, but there is no recession. Consumer confidence on the labor market fell, but the unemployment rate is the lowest since 1969, job cuts in September were the 2nd lowest of the year, and jobless claims are near their cycle low. The elephant in the room that is causing uncertainty is the trade war.
Divergent Recession Odds
There are many recession odds charts. We have shown the odds using the ISM PMI, the yield curve, and the unemployment rate. The chart below uses the yield curve and the excess bond premium.
While the Treasury market is sending a loud recession signal for the next 12 months, corporate credit is saying something quite different. In September, the excess bond premium, a measure of risk taking in corporate credit, implies less than a 10% chance of recession in 12 months pic.twitter.com/dplCnjSVSe
— Renaissance Macro (@RenMacLLC) October 7, 2019
The yield curve predicts a recession in the next year since it inverted. If it’s correct, there will be a recession when the curve steepens. The excess bond premium shows there’s low risk of a recession in the next year. It did have a false reading in late 2015 and early 2016 like many indicators did since that was a slowdown.
To be clear, the excess bond premium measures risk taking in corporate credit. The EBP measures the variations in the pricing of corporate credit risk instead of the changes in the probability of default by the issuer. The model built by Gilchrist and Zakrajšek uses secondary prices of unsecured bonds. A synthetic security was created to measure the bonds’ cash flows to avoid duration mismatch.
Improving Cyclical Economy
While the global economy looks grim, it’s not incorrect to look for green shoots. A global cyclical recovery could occur in 2020 especially since global central banks have been cutting rates (India has also cut taxes).
The chart below highlights the 3 slowdowns in the global manufacturing PMI since the 2008 recession. As you can see, the manufacturing PMI rose from 49.5 to 49.7 in September. We’d like to see it above 50 before making any assertions about a turnaround.
Weekly Market Notes (t.co/a5m99loER9):
-Noisy headlines fueling volatility
-Cloudy outlook threatens to weigh on economic confidence
-Not yet spring, but at least silver linings (including an uptick in global manufacturing data). pic.twitter.com/I8pj7LT6RV— Willie Delwiche (@WillieDelwiche) October 7, 2019
The new orders index increased 0.4 to 49.4 and new export orders increased 0.6 to 48. These readings are all in contractionary territory. The 3 strongest countries were Greece, Brazil, and Myanmar. China, India, and America were all above 50. The 3 weakest were Austria, Czech Republic, and Germany.
On the other hand, business activity in the global services PMI fell from 51.8 to 51.6. The new business index fell 0.5 to 51.4 and new export business fell 0.7 to 48.8. This caused the output composite to fall 0.1 to 51.2. It needs to be below 50 before we see a global recession.
Earnings Update
Earnings season will heat up next week as the major banks report results. So far, it doesn’t look good as the table below shows.