There are a few words no one likes to hear in economics, but the most feared might just be “recession.”
Just because it is worrying, however, doesn’t stop people from saying it. And after Friday’s economic data misses from both the Bureau of Labour Statistics’ jobs report and the ISM’s non-manufacturing Purchasing Manager’s Index, which measures the health of the services economy, there are a few voices that have uttered this feared term.
Barclays’ economists brought up worries of a possible recession after the jobs report number.
“Since 1960, when payroll growth has dipped persistently below its recovery-period average, the US economy has more often than not found itself in an NBER-defined recession 9 to 18 months in the future,” said Barclays.
“Hence, that payroll growth has fallen below the current expansion average in three of the past four months signals to us that risks of a near- to medium-term recession have risen.”
JP Morgan’s proprietary model that gauges the risk of a recession starting over the next 12 months also hit its highest mark since the financial crisis on Friday. Most of this was on the back of lacklustre economic data.
“With the rally in risk markets over the last month, our models based on financial market pricing now see a recession risk moderately below our model based on macroeconomic data,” wrote JP Morgan economist Jesse Edgerton.
“Since last week, we have seen disappointments in the Dallas Fed measures of manufacturing and nonmanufacturing sentiment, the ISM nonmanufacturing index, and the Conference Board measure of consumer confidence.”
Edgerton also followed that up by highlighting, as we have before, the decline in profit margins. Typically, when profits margins begin to decline that is an indication that a recession is not too far away.
Some have speculated that the margin compression will not lead to a recession because it is similar to the oil-led margin drop in the late 1980s. In that case, as oil prices improved (like they are now) margins recovered and the US avoided the recession.
Edgerton noted, however, that there is one difference that makes this more like a typical profit decline, thus heralding the start of recession. Here’s Edgerton:
But we see less impetus for a 1980s-style rebound in other industries. In particular, the dollar was likely a key contributor to the rebound (Figure 3). It is true that the real dollar rose sharply through early 1985, contributing to the initial margin squeeze. But then the real dollar fell 28% by 1988, driving double-digit growth in real exports that contributed more than 1%-pt to GDP growth and presumably boosted profits, margins, capex, and hiring. At the moment, with the global economy struggling to grow above trend and the Fed debating more hikes in response to a tightening US labour market, we see little reason to expect another historic dollar depreciation.
Let’s be clear, a few data points do not equal a recession. The average rate of hiring is still fairly healthy and some downturn in the headline number was expected. Consumer spending is still high and forecasts for GDP growth remain strong.
That doesn’t mean that Friday’s numbers aren’t worrying, they are, but perhaps the “recession” whispers will stay just that for now, whispers.
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