Perhaps it’s time to stop referring to it as the “r-word.”
We’re talking about “recession.”
On the whole, the torrent of US economic data has been pretty good since 2009, which is when the last recession ended. From the labour market to the stock market, the trend has been growth.
Indeed, there are troubling signs that the upward trends may be coming to an end and the start of recession is nearing. Remember: recessions don’t begin when times are bad; they begin while times are still good.
Bloomberg’s new survey of economists’ recession expectations picked up for the first time in 14 months on Friday. Economists were asked the likelihood of a recession in the next 12 months, and the median came in at 15%, the highest since October 2013.
“We tend to have recessions every seven years, more or less in the United States, since World War II,”David Rubenstein, CEO of The Carlyle Group, told Bloomberg TV. “So at some point in the next year or two or three, you can expect a recession.”
We compiled some of the warnings signs that have people fearing a recession is near. For what it’s worth, we threw in a few reasons why the worrywarts have the story wrong.
Both major national manufacturing indicators came out with weak numbers on October 1. The Markit purchasing manager's index registered its second-lowest level since October 2013 and Institute of Supply Management's (ISM) index was 50.2%, the lowest since May 2013.
'The US manufacturing sector has seen a distinct loss of growth momentum in recent months,' Markit's Chris Williamson said. 'Headwinds include the rising dollar, weak demand in global markets, a downturn in business investment and financial market jitters.'
Regional manufacturing surveys are equally bearish. September's reading of the Chicago PMI was 48.7. That was the fifth time the indicator has come in under 50 this year, which is the threshold for contraction. According to the report from the ISM this was due to 'downgrades to global economic growth and intense volatility in financial markets.'
The latest Empire State Manufacturing Index remained in negative territory as well. After registering its worst number since 2009 in August, the index ticked up only 0.3, to -14.7.Additionally, the number of workers that worked in manufacturing for the area declined, as did hours worked for those who were employed.
The Dallas Fed's survey has been negative almost all year and came in at -9.5 in September. And one respondent said that they were laying off workers for the first times in decades.
According to analysts at TD Securities, the outlook for manufacturing is gloomy, and the sector is in a recession. 'The manufacturing sector has been like a sore thumb for the US economic recovery lately,' TD wrote Wednesday. 'Since last year, this crucial sector has struggled to navigate against the headwinds coming from the collapse in global energy prices, the drag from the strengthening dollar on export activity and the weakening in global demand.'
Tuesday's trade data shows that the gap between exports and imports for the US widened from $US41.2 billion to $US48.3 billion, a huge jump. According to Ian Shepherdson at Pantheon Macroeconomics, this is terrible news for US growth. 'All we know for sure is that exports have never recovered from the hit they suffered during the port dispute, and the ISM export orders index offers no hope of improvement anytime soon,' said Shepherdson. 'Assuming a modest rebound in September exports, we look for net foreign trade to subtract a hefty three-quarters of a percentage point from Q3 annualized GDP growth.'
The September jobs report was seriously underwhelming. Nonfarm payrolls added only 142,000, much less than the 200,000 expected. Additionally, the number of jobs from August's already weak report were adjusted downwards, against the typical trend, making it a double whammy. This is the worst two-month total since December 2013 and January 2014.
The labour force participation rate, which is the percentage of the American population working or actively seeking a job dropped like a stone during the Recession and has stayed low, hitting a new low in September at 62.4%. This was the lowest reading since October 1977. This is seriously worrying, said Tyler Cowen, an economics professor at George Mason University and author for the blog Marginal Revolution. 'Labour force participation is down once again, and we cannot dismiss the notion that a new recession may be starting,' wrote Cowen. 'That said, at current margins I am not sure the traditional distinction between cyclical and structural factors still makes sense, so that word 'recession' may be more misleading than illuminating.'
Wages for the American worker, which have been predicted to start climbing for months, also came in lower than expected in the September report. With the unemployment rate so low, expectation were that labour costs would increase as businesses fought to hire a smaller pool of candidates, raising wages. So far, this just hasn't happened.
Gallup's monthly survey of consumers shows that Americans are steadily getting more worried about the economy. The survey of 14,684 adults over the month found sentiment around the lowest in a year. 'Twenty-four per cent of Americans rated the current economy as 'excellent' or 'good,' while 31% rated it as 'poor.' This results in a current conditions score of -7,' reported Gallup. 'Thirty-eight per cent of Americans said the economy is 'getting better,' while 58% said it is 'getting worse.' This results in an economic outlook score of -20. The economic outlook score has trailed the current conditions score since March.'
Earnings growth for the companies in the S&P 500 have been negative for 2 straight quarters, which rarely happens outside of recessions.
The stock market is also throwing up warning signs. Expectations are that earnings per share for S&P 500 companies will decline for the second straight quarter when reporting begins in earnest next week, the first time that has happened since 2009. For some analysts these weak underlying growth trends are worrying for the broad economy. 'Many seem to celebrate the absence of a recession,' said Deutsche Bank's David Bianco in an email to Business Insider. 'The labour market continues to tighten, and thus I expect the Fed to hike, but other than some bright spots like auto and housing, growth is extremely weak with underlying drivers like productivity and investment disturbingly poor and S&P profits are not growing.'
A drop in company profit margins like we're currently experiencing has only happened without a recession once.
Profit margins have dropped off as well, registering a 0.6% drop in the last 12 months. According to Barclays' Jonathan Glionna, this is a telling sign for the economy as a whole. 'We analyse the link between profit margins and recessions for the last seven business cycles, dating back to 1973,' wrote Glionna. 'The results are not encouraging for the economy or the market. In every period except one, a 0.6% decline in margins in 12 months coincided with a recession.'
Contracting profit margins and earnings are bad news for stocks, which are already trading a rich valuations.
Additionally, as Business Insider's Henry Blodget pointed out, looking at a broad view of stock market valuations, it indicates a bear market which should continue for about 10 more years.
Recessions are brutal for stocks, especially when valuations are high. Prices plunged in every recession but one.
'Of the nine market declines associated with recessions that started with valuations above the mean, the average decline was -42.8%,' Advisor Perspectives' Doug Short observed. 'Of the four declines that began with valuations below the mean, the average was -19.9% (and that doesn't factor in the 1945 outlier recession associated with a market gain).'
Regarding manufacturing, it's a relatively small portion of GDP, so its downturn doesn't signal total doom for the economy.
The reason the manufacturing worries seem overblown is that the sector only makes up around 12% of US GDP. The rest is driven by consumer spending and the service sectors, which slowed but remained in good shape in the ISM's latest service sector survey Monday.
Auto sales remain at decade-long highs and are still climbing. This is a reliable sign of robust consumer confidence.
That bigger part of the economy, the American consumer, is also looking fine. According to Tom Porcelli at RBC Capital Markets, auto sales are doing spectacularly. 'In case anyone missed it, auto sales just shot up to a fresh cycle high of 18.2 million (also the best since 2005) while mortgage purchase applications through late September were running 20% above year-ago levels,' said Porcelli. This is important because auto sales, along with home sales, indicate a more confident consumer that is willing to take on long-term payments.
And weak monthly payrolls are no reason to fear. Weekly unemployment insurance claims are a sign the labour market is very healthy.
Initial jobless claims fell again Thursday, moving the four-week average of people claiming unemployment insurance down to 267,500. 'The nervousness among employers evident in the recent payroll numbers
-- if you believe them -- is entirely absent from the claims numbers, just as almost all indicators of hiring haveremained strong,' wrote Pantheon Macroeconomics' Ian Shepherdson after the release. Additionally, the ADP private payrolls, released September 30, showed a 200,000 job growth.
According to the folk who compute recession probabilities, the recession probability still is incredibly low.
TD Securities, while calling for a manufacturing recession, say that a broader recession for the US economy is unlikely. 'To be sure, it is not our belief that the US economy is in or about to enter a recession,' said TD Wednesday. 'Our proprietary model indicates a 1% chance that the US economy is in a recession, and a 16% probability that it enters a recession in 6 months.'
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