According to Edwards, “the ECRI recession call should be listened to more closely,” even though it’s come under a lot of fire.
In fact, Edwards says that now that the fiscal cliff has taken over the headlines, everyone may be incorrectly attributing new weakness in the economic data to the cliff’s effects, when in fact, it’s just what one would expect before any typical recession.
The bearish SocGen strategist’s argument goes like this:
Certainly if the US has already slipped into recession, this would help explain why our preferred measure of whole economy profits declined, albeit marginally, in Q3. We have always monitored pre-tax, domestic, non-financial, whole economy profits particularly closely because this measure of the underlying profitability of the business sector is probably the best leading indicator of domestic business investment, and that has also been weak recently.
Many have attributed the weakness in investment to uncertainty about the fiscal cliff. But if underlying profits are under pressure, then so too will be investment. So although much of the S&P eps downgrading by analysts is being attributed to severe weakness abroad, what the latest whole economy profits data show is that the domestic business situation is also weak. The ECRI recession call should be listened to more closely.
Edwards continues, highlighting the frightening decline in NFIB Small Business Optimism last month (emphasis his):
“Something bad happened in November…and it wasn’t merely Hurricane Sandy”, the NFIB chief economist Bill Dunkelberg is quoted as saying see chart below and link. Even scarier than the decline in the headline measure was the 37% slump to an all-time low in those firms who believe economic conditions will improve over the next six months. That 37% drop is twice the previous record 18% decline, which occurred in the immediate aftermath of the Lehman’s collapse…For those who might immediately retort that this is a sentiment indicator that should be used as a contrary indicator you are wrong. It is a good leading or at worst coincident indicator.
The chart below highlights the drop Edwards refers to:
Photo: Societe Generale
Edwards concludes, “I would say this datum is more than consistent with the recession that Lakshman Achuthan of the ECRI has been warning of, wouldnt you?”
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