Artur
A recent poll conducted by Harris and British news agency The Guardian showed some interesting results. Of those surveyed:
- 56% believe that the US economy is in a recession
- 49% believe the S&P 500 will fall this year
- 49% believe The unemployment rate is at its highest level in 50 years
- 72% believe that inflation is increasing
Reports on this were mostly political because the poll also found that 58% blame the Biden administration for the current state of the economy. I think this is in keeping with the territory in politics. If you are in charge, you will take blame when things go wrong and credit when things go well. I would also say that at any given time, there are policies from both parties that are impacting the economy. Do Trump’s tax changes still affect the economy? (Of course it is). Are Biden’s definitions significantly different from Trump’s? (Only that Maybe Biden would force more.) Was health care a mess under both parties? (Yes.) Was it Biden or Trump’s excessive spending that caused the increase in inflation? (The only thing both parties agree on is that they know how to spend our money better than we do.) What makes this survey interesting is that many of the participants seem to live a reality separate from… um… reality. Why? I don’t know, but if it’s perception Become The reality is that the economy is in big trouble.
For investors, the state of the economy is obviously important, but for most, a general sense of the state of affairs is sufficient. It doesn’t matter much whether the economy is growing at 2%, 1.5%, or 2.5%; What matters is that it grows and does not shrink. In fact, what really matters to investors is not the economy itself, but how markets react to it. You can get a really good idea of the global economy by observing the trend in the 10-year Treasury note rate, the 10-year Treasury note rate, and the US dollar. The first two tell you about real growth and inflation in the United States and the third, the dollar, tells you how the United States is doing compared to the rest of the world. This covers a lot of ground with just three indicators that you can check in a few minutes every day.
At any given time, there will be parts of the economy that are contracting while others are expanding, some parts that are growing quickly, others that are growing slowly, and some that are getting smaller while others are getting larger. Some of these things are driven by government policy and some are just natural cycles, both short and long term. If you spend all your economic analysis time focusing on poorly performing parts of the economy, your view of the entire economy is likely to be negative. If you only look at the positive parts, your view will be positively skewed. There is already a lot of information when it comes to economics. So focus on the big picture and market based indicators as much as you can. We realize that recessions are only apparent in retrospect. The 2008 recession was one of the worst we’ve ever seen, but it wasn’t evident until at least the third quarter of 2008, although it was officially dated later in late 2007 when it wasn’t evident at all.
Initial jobless claims are essentially unchanged from a year ago in November 2007 when the recession officially began. The ISM Manufacturing Index was as high as 49.2 in August 2008, nine months after the start of the recession. The 10-year Treasury note traded at a yield of 4.11% in October of 2008 and closed the month at 3.97% which was essentially unchanged for the year so far. The dollar was mostly unchanged in August 2008 from November 2007.
But there were signs that a recession was on the way. Interest rates on Treasury bills and the two-year Treasury yield were falling rapidly, with the two-year yield falling by 200 basis points from July 2007 to July 2008. Unemployment claims, which were 300,000 in September 2007, rose to more than 400,000 by July 2007 2008. Car sales were about 16 million in November 2007, but declined every month in 2008, reaching 12.7 million in July. Credit spreads were 2.5% in the summer of 2007, but had risen by more than 500 basis points by March 2008 (200 is our recession warning). The Chicago Fed’s 3-month National Activity Index averaged -0.77 in December of 2007, down from the -0.75 associated with the recession.
So, yes, there were some signs of a recession in 2008, but most of the decline occurred after October when Lehman Brothers failed. Before then, it was easy to convince yourself that a soft landing was on the way. There were numerous articles to that effect until the summer of 2008. Since this is where we are now – in the soft landing zone – I don’t think we should dismiss a poll showing that half of Americans believe we are in this zone. The recession is now purely political. Assuming they answer on the basis of their political desires, they may end up being right for all the wrong reasons.
My view of the economy at present is that it is still growing on trend (about 2%), which is slightly lower than Q3 (4.9%) and Q4 (3.2%) of last year but only slightly throughout 2023. (2.5%) . From a more detailed point of view, there are some areas of concern, some structural (industrial production) and some related to interest rates (housing). Here is a quick snapshot of economic data with annual change:
Reports I consider negative are in red, neutral in yellow, and positive in green. As you can see, there are quite a few negatives but more positives overall. The negatives that stand out relate to inflation and their perception of it. And the housing data in particular is painful, with home prices up 7% in the past year, the home ownership rate declining, the inventory of homes for sale just 3.5 months after being sold, and the housing market index back below the 50 level. The housing market is something that touches everyone. A family and every generation. I would also point out real disposable personal income (after taxes, adjusted for inflation) which is up 1.4% year-on-year, but that’s only about half the average since 1980. The economic data is also aggregated, so some people, Probably a lot of people, who are doing worse than average. Finally, for the survey question about inflation, I think most people don’t understand the difference between level and rate. Prices are still rising, so someone has to take the blame.
For our purposes as investors, there are no signs of a recession at the moment.
- The 10-year yield has risen over the past year and has remained flat over the past six months.
- The two-year Treasury yield has traded sideways since late 2022 and has fallen just 30 basis points from its October 2023 peak.
- Credit spreads are just over 3% and within 10 basis points of the low of this cycle.
- Initial jobless claims stand at 215,000, up from 195,000 at Christmas 2021.
- The unemployment rate was 3.9%, up from 3.4% in April 2023. In 2008, the unemployment rate rose from 4.4% in May 2007 to 6.5% by October 2008.
- The 3-month average of the CFNAI is 0.01; A reading of 0.00 indicates that the economy is growing in trend.
- The year-on-year CPI inflation rate fell from 9% in June 2022 to 3.4% last month. This puts it in the comfort zone of investors. The best returns occur when inflation is between 2 and 4%.
- Corporate profits rose 5% year-on-year at the end of 2023, and the first quarter of 2024 looks set to be better.
The economy is (probably) not in a recession right now. I say maybe only because economic data is under review and the start date of the next recession will be determined long after it occurs. The dating committee could date the start of the recession by now if things deteriorate quickly from here. The S&P 500 hasn’t fallen this year, the unemployment rate is clearly closer to a 50-year low than a 50-year high, and inflation is moderate even if prices haven’t fallen. Are the people who took this survey aware that this is so bad? Do they answer based on their political leanings? Do they answer based on their emotional feelings about the economy? I don’t know, but this poll makes me nervous because so much of economics is driven by the emotional state of the people who make up the economy. If this is any indication of the actual conditions these people are living in, there is a possibility that the economy will deteriorate quickly. I know a lot of economic and market watchers are hoping for lower interest rates right now, but this could be one of those times when you need to be very careful about what you wish for.
environment
Interest rate and dollar trends have not changed, but as I have been saying for over a year, both appear to be peaking.
Markets
The S&P 500 managed to post gains last week, but most everything else was down, primarily due to concerns about interest rates. REITs were hit hard again, down 3.6% over the week and now 6.5% year-to-date. However, they are up 9% year over year, which is consistent with what we have seen in the past when prices peaked. If history is a guide, REITs will see a spike when interest rates enter a short-term downtrend. Since the early 1970s, when the industry emerged, REIT returns when the 6-month change in the 10-year Treasury yield is negative have been twice the return when interest rates rise. The 6-month change in 10-year interest rates has been negative for a few months now.
Sectors
Energy fell more than REITs last week, although YTD and 1-year returns are very respectable.
Market/economic indicators
Economic calendar for this week:
- Tuesday – Home prices in Case Schiller
- Wednesday – Richmond Fed Manufacturing Index
- Thursday – First review of first quarter GDP, unemployment claims, and pending home sales
- Friday – Personal Income and Spending, Personal Consumption Expenditures Price Index (Fed’s preferred measure of inflation)
Original post
Editor’s note: The summary points for this article were selected by Seeking Alpha editors.
