We are not economic forecasters, prognosticators or investment advisers. In fact, we claim no crystal ballery skills at all. But we do keep an eye out for consumers and have been tracking some disconcerting signs about the U.S. and global economy that began emerging in second half of 2017. In 2019, we documented a likely recession coming in 2020 and, alas, it looks like that recession is unavoidable.
We share the following observations with you because, so far, they’ve stayed below the news radar and they could very likely affect U.S. households in the coming years. In light of record stock prices and low unemployment figures, it is hard to see any underlying weaknesses in the U.S. economy. However, the rosy projections for a continued economic boom advanced by Trump and some overly-optimistic tax cut proponents appear to be overlooking many troubling economic storm clouds that knowledgeable observers see building on the horizon. To reiterate: we aren’t offering an expert opinion……we are just collecting information provided by reputable and credible economic forecasters. So, if you are about to make a big purchase, change careers, take-on a large debt or make a big retirement decision, you may want to note the following harbingers of economic turbulence that are on the next five-year horizon:
May 2020: When four out of five doctors recommend something, people listen. But how about when 30 out of 31 macroeconomists dismiss the notion of a V-shaped recovery. The Initiative on Global Markets, a research center at the University of Chicago Booth School of Business, surveyed a group of quantitative macroeconomic researchers who work in academic settings about the trajectory of the economic crisis. The vast majority of them did not see a recovery until the end of 2020, or more likely, in the mid-2021 time period. The majority didn’t foresee the economy getting back to where it was at the beginning of this year until 2023 or thereafter. This is a must read for anyone who is trying to wrap their hands around this pandemic-fueled recession.
May 2020: So what are the important indicators to watch during this recession? We’ve discussed many of them below: consumer sentiment, jobless claims, industrial production, nonfarm payrolls, stock market return and the slope of the yield curve. But there are others that also bear watching. They include the Job Opening and Labor Turnover Survey, or JOLTS, compiled by the Labor Department , retail sales and core consumer-price index. Right now, all of them look bad — really bad. But any recovery will have to be led by many of these indicators.
May 2020: Forget about the V-shaped recession. Far more likely is a L-shaped recession, according to a new working paper circulated by the National Bureau of Economic Research.The reason, according to Victoria Gregory and Guido Menzio of New York University and David Wiczer of Stony Brook University, is their estimate that unemployment won’t quickly ebb. Data released by the Labor Department on Friday showed the U.S. unemployment rate rose to 14.7% in April from just 3.5% in February. Their model assumes a three-month lockdown and 12 months of uncertainty, which is probably an over-optimistic assumption.
April 2020: The ill-fated “Trump Stimulus Giveaway” appears not to have worked as advertised. As per an Axios/IPSOS poll,: “More Americans have chosen to save their CARES Act direct payment checks than spend them, even to catch up on bills or purchase household needs. The stimulus checks were allegedly designed to stimulate consumer spending. Yet, the poll shows over 38% of respondents planned to put the money into their savings. Another 26% planned to use the money to pay off debt.
April 2020: The Federal Reserve’s chief, Jay Powell, made it abundantly clear that economic recovery is not coming in 2020, or perhaps even 2021. In a videoconference, Powell is quoted by the Financial Times as saying: “Looking out over the ‘next year or so’, there was still huge uncertainty over whether the virus itself could be defeated, there was the risk of “damage to the productive capacity of the economy”, there was a ‘very negative’ global dimension to the problem, and consumers would be cautious as they started spending again.”
April 2020: How bad is this upcoming recession/depression? According to Bank of England governor Gertjan Vlieghe, it is the “worst economic slump in centuries”….including World Wars 1 & 2. U.K.’s composite purchasing managers index (PMI), which tracks both services and manufacturing, fell to 12.9 in April, down from 36 in March, which was the previous record low since the survey began in the 1990s. Similarly, the Eurozone PMI dropped to 13.5, which the lowest level ever recorded in its history. European observers appear to agree that a recovery can’t be expected until 2022, at the earliest. As per Steven Friedman, senior macroeconomist at MacKay Shields, :“It’s a long tough slog.”
April 2020: The Congressional Budget Office released its economic forecast for 2020 and 2021 — and it’s not pretty. This non-partisan office (which assists in the federal budgeting process) suggests that unemployment will rise to 16% later this year and persist at that level throughout 2021, resulting in a net loss of about 6 million fewer workers. Growth also is expected to slow significantly, dropping far below levels touched during the 2007–2009 Great Recession. Worse yet, the U.S. annual deficit will rise to $3.7 trillion, which is 17.9% of GDP this year, and to 9.8% of GDP in 2021. (The annual deficit was 9.9% of GDP immediately following the Great Recession)
April 2020: The U.S. Conference Board reported that its index of leading economic indicators (LEI) sank 6.7% in March. This amounts to the the largest decrease in the 60-year history of this economic indicator, breaking the prior record drop of a 3.4% in October 2008. Why is this indicator important? This closely followed index measures the nation’s economic health by tracking 10 indicators. Worse yet, the April numbers are likely to be even worse! MUFG Union Bank Chief Financial Economist Chris Rupkey pointed out in a recent CNBC interview: “The economy is clearly in ruins here,” Rupkey said. “Nobody is buying cars, down 25.6%, nobody is buying furniture, down 26.8%, and eating and drinking places were down 26.5%.”
April 2020: U.S. banks reported plunges in their profits. But that’s not because they are losing money. The underlying story is that the banks are hoarding their cash to prepare for what they view as a bad recession. Really bad! When the country’s financial institutions begin to pad their reserves, this should be a wake-up call to American households. Start preserving assets (and perhaps even buying up yet more toilet paper) because this coming summer we are going to be hit with an economic blizzard.
April 2020: JPMorgan’s economists issued a dire economic forecast. The financial services giant foresees a 40% decline in the nation’s gross domestic product for the second quarter and a surge in April’s unemployment rate to 20% with 25 million jobs lost. Back in October, we indicated that manufacturing was in a recession at that time. This month, data shows industrial production falling to levels last seen in 1945 when the economy moved from war production to peace.
April 2020: The U.S. unemployment is now in the neighborhood of 15%, (over 6.6 million have filed for unemployment) and appears to be climbing towards the 25% unemployment rate reached during the Great Depression. The data lags by a week, so while a large portion of the economic shutdown is now evident over the last three weeks, there may still be more huge numbers yet to come. But the numbers are actually worse than they appear, according to Marketwatch. Since mid-March, 16.9 million people have filed jobless claims since layoffs and shutdowns related to the COVID-19 pandemic . This mean that nearly one out of 10 people who had a job to go to before the pandemic doesn’t have one now. Most tell, though, is there are people who actually cannot file for unemployment either because they don’t qualify for unemployment benefits (think parents who have to stay home with school-age kids, people quarantined because they’re at high risk for COVID-19 and new graduates who can’t even look for work) or the self-employed, independent people (i.e. service or gig workers). Economists appear to agree that since we don’t know how many businesses will fail while waiting on reopening or bailouts, this may just be the first wave of joblessness. And if the coronavirus returns (as is expected) later this year or early next year, more job losses will follow.
April 2020: The Council for Foreign Relations held a (tele)conference that heard from a number of highly-regarded economists and policymakers. Their observations are important to factor into the future economic calculus. Here are some relevant quotes from the speakers, as per Axios: From Kurt M. Campbell (a former U.S. assistant secretary of state) “The next president … is going to face a situation where the coffers are empty, many businesses are bankrupt, the social safety net has been ripped and at the same time we have a rising power in the East.” From Torsten Slok, chief economist at Deutsche Bank Securities, “the post-virus world will include a more risk-averse public that prioritizes savings, similar to what we saw after the Great Depression in the 1930s.” And finally, JPMorgan CEO Jamie Dimon warned, “At a minimum, we assume that [COVID-19] will include a bad recession combined with some kind of financial stress similar to the global financial crisis of 2008,”
April 2020: The discussion has now shifted to how long and deep a recession lays ahead. A small cabal of optimists suggest a V-curve is possible. More likely, we are facing an L-curve. A quick recovery is unlikely largely because of the disruption that has occurred in major parts of our economy. Moreover, uncertainty about the world’s ability to handle the current coronavirus pandemic and its expected resurgence later in 2020 creates a risk that markets cannot gauge. This is leading many economists to prepare for a prolonged and severe recession/depression.
March 2020: China’s econony is recovering some three-months after the Wuhan epidemic sparked a global pandemic, right? Not exactly. Even though China’s factories are re-opening, they are faced with a global recession in which there’s no demand for Chinese goods, according to a well-regarded China analyst. Even worse, COVID-19 exposed a number of weaknesses in the global supply chain that China has forged over the past two decades. Many of its customers will eschew reliance upon China (or any international supply chain) in the future. The bottom line is that China faces a long road back to economic recovery because the fuel powering China’s economy engine is dissipating into the ether.
March 2020: The dreaded negative interest rates that have NEVER occured in American history is now here. Yields on both the 1-month and 3-month Treasury bills dipped below zero just a week and a half after the Federal Reserve cuts its benchmark rate to near zero. Why would investors be willing to give away a portion of their savings? Because they are willing to take a small hit in a market in turmoil. These are scary times, even for sophisticated investors.
March 2020: Not to beat a dead horse, but here’s an important economic indicator to consider. On March 8th, the yield on the benchmark 10-year Treasury touched a record low of less than 0.4%, while the 30-year Treasury yield slid below an unprecedented 1%. As we reported in 2019, investors were fleeing equity markets and seeking the safety of government bonds. That’s why we saw mortgage prices drop in late 2019 and earlier this year. However, in light of the uncertainty of COVID-19 and the oil price war, these investors are stampeding to the investment sidelines. With Fed rates already at 1% to 1.25%, the Fed has little scope for further cuts before they hit zero. In a zero interest world, the 1% 30-year Treasuries look downright attractive.
March 2020: Much of the media’s attention has been focused upon the global recession, coronavirus and oil. But what investors really need to be considering is corporate debt. U.S. nonfinancial corporate debt has risen to nearly 47% of gross domestic product. NBC reports that for the first time in modern history, commercial loans are the largest group of assets held by banks, surpassing mortgage loans, which had been the top holding. If American businesses have not put aside contingency funds, many of them will be facing default in just a few months. As lenders nervously flock to the sidelines, it is highly likely that corporations will be squeezed into default and/or bankruptcy. In February, the OECD warned of risky corporate debt. The current equity market implosion is likely to exacerbate the problem — perhaps fatally for many underfunded companies.
March 2020: What is there to say that hasn’t been said? Apparently, the question now is how to best deal with the upcoming global recession. The Economist’s conclusion that global GDP will shrink in 2020 is sobering reading. Goldman Sachs reckons global GDP will shrink at an annualised rate of 2.5% in the first quarter. China is resigned to GDP contraction for the first time since Mao’s death in 1976. The NY Times says barbershops may be the canary in the economic mine.
February 2020: The coronavirus (COVID-19) pandemic is being blamed for this month’s stock swoon. But this was just the final straw in a global economy that was already in recession. With China and the U.S. now unavoidably headed to slow-downs, the die has been cast. Get ready for a bumpy ride!
February 2020: CEOs of major US corporations are resigning in droves. On February 27th, four major public company CEOs announced their departure, independently. It’s no secret why – U.S. corporations are very bearish on the economy and have been for awhile. But when CEO’s all start retiring, it means they are getting out while they still have a legacy.
February 2020: New research from the MIT Sloan School of Management and State Street Associates gives a 70% chance of a recession hitting in the first half of 2020. The researchers looked at four market factors — industrial production, nonfarm payrolls, stock market return and the slope of the yield curve.
January 2020: This month, the 10-year-bond yield fell dramatically, as investors fear the virus could have an immediate impact on the economy in China and broader Asia, and then ultimately chill global growth. The yield is now at levels last seen in late 2019, in the midst of the China-US trade war.
January 2020: If you’ve not heard of Paul Tudor Jones, you may want to look him up. He’s one of the most successful and watched financial investors in the world. The billionaire investor said in a recent interview that the current stock market is similar to the dot-com bubble: “We are just again in this craziest monetary and fiscal mix in history.” He pointed to the coronavirus as having the potential to upend markets because of the uncertainty it causes in global markets.
January 2020: If 40% of U.S. public companies have lost money over the next 12 months, how does the U.S. economy continue to expand. That’s what the Wall St. Journal asked when it noted that the number of companies in the red is the highest level since the late 1990s…….just before the infamous dot.com recession. History and economics can’t be easily dismissed.
January 2020: The nation’s top executives continue to believe the economy will tank in 2020. Unlike the stock markets, that are driven by computer algorithms and professional gamblers, U.S. corporations are expecting a downturn. Deloitte’s quarterly survey of top CFOs reveals that 97% of these executives believe the downturn has already begun.
December 2019: A reputable international think-tank released a report in which it described 2020 as a “tipping point”. Their point: in 2020, we have a combination of negative trend lines that we’ve not experienced in generations. They view a deteriorating environment which is much more likely to produce a global crisis.economic and geopolitical trends. The global economy, after emerging from the great recession of 2008 with the longest expansion of the post-war period, is now softening. More economists expect a recession in 2020 or 2021. Their recommendation: fasten your seat belts!
November 2019: So the stock market hit a new high on November 5th. Pundits say signs of recession are fading. Don’t believe it. In 2008, just months before the Great Recession, the Bureau of Economic Analysis announced that growth had dropped to 0.6%. The economy lost 17,000 jobs, the first time since 2004. The Dow shrugged off the news and hovered between 12,000 and 13,000 until March. Then, on March 17, the Federal Reserve intervened to save the failing investment bank, Bear Stearns. The Dow dropped to an intra-day low of 11,650.44 but seemed to recover. In fact, many thought the Bear Stearns rescue would avoid a bear market. By May, the Dow rose above 13,000. It seemed the worst was over. Another shock hit in July when the Treasury Dept had to intervene to save FreddieMac and Fannie Mae. The stock market rebounded. But just a few months later, the market was shook by Lehmann Brothers bankruptcy in September. Again, the market rebounded. But it marked the downward trend that hit in November, after the Presidential election, when the the largest market drop since the Great Depression rattled the world markets.
October 2019: Axios reports that approximately two in three finance officers in large cities are predicting a recession as soon as 2020. This is gleaned from a new report by the National League of Cities. It shows weakening major economic indicators and shrinking revenue sources putting pressure on municipal budgets. Notably, for the first time since the Great Recession, U.S. cities expect revenues to decline as they close the books on the 2019 fiscal year. Meanwhile, Bloomberg News’ editorial board points the finger squarely at Trump for causing an inevitable global recession. This normally business-friendly publication is highly critical of the Businesscam-in-Chief who poses as President.
October 2019: The second shoe is dropping. Retail sales unexpectedly dropped 0.3% in September, marking their first decline in seven months. Spending cutbacks on motor vehicles and online purchases, among other factors, are the factors that contributed to this surprising drop. Given that the U.S. economy is currently dependent upon U.S. consumer spending, this development is a harbinger of things NOT to come. Watch for retailers to begin curtailing their X-mas inventories.
October 2019: From Foreign Policy: “manufacturers who are talking about falling orders—especially for exports—and bulging warehouses, sending the U.S. purchasing managers’ index to its lowest level since the depths of the Great Recession a decade ago. Of the 18 manufacturing sectors tracked by the index, 15 showed contraction in the latest survey; in some sectors, such as metal firms hammered by Trump’s tariffs on steel and aluminum, bankruptcies have begun. Farm bankruptcies, collateral damage from Trump’s trade war with China, have been rising for a year.” It reports, accurately, that a global recession is happening as we speak and there’s no basis to assume that somehow the U.S. will be immune from the world-wide recession bug. The facts are the facts.
October 2019: The chief U.S. economist for Societe Generale predicts a recession in 2020. Gallagher’s evaluation is this: U.S. recessions are typically preceded by an erosion in corporate profit margins, or profit per dollar of revenue. Costs generally rise near the end of the cycle while sales flatten out. Profit margins for U.S. nonfinancial corporations peaked in 2015 at 15.2% of gross value added, and have fallen to 10.9% in the latest quarter. A note: Gallagher was awarded MarketWatch’s Forecaster of the Month contest as the most accurate U.S. economic forecasters.
September 2019: Looks like we are “importing” a recession. Shares of FedEx plunged about 14% in one day after the company publicly blamed the U.S.-China trade war and global slowdown for an impending slowdown: “I think there is a lot of whistling past the graveyard about the U.S. consumer and the United States economy versus what’s going on globally,” said FedEx’s CEO. AT&T Chairman Randall Stephenson shared similar sentiments Tuesday while presenting at a Goldman Sachs conference: “U.S. business is so dependent upon exports and trade. And when you have your two biggest trading partners kind of frozen between the NAFTA rewrite and China trade, it shouldn’t be a surprise to anybody that business investment starts slowing down. And that’s exactly what we’re seeing.” Apparently, Trump’s anti-immigration policy won’t be able to keep the global slowdown out of the U.S.
September 2019: You’ve likely never heard about overnight repurchase rates. They are the cost of money that enables the global financial system to complete market transactions. The rate usually ranges between 2%-2.25%, as set by the Federal Reserve. However, on Sept. 16th, these rates more than doubled and then doubled again, hitting 10% late that evening. The NY Fed jumped in and injected $53 billion into this collapsing market function. It’s expected to add another $75 million on the 17th. This is the first time the Fed has had to intervene in a failing market institution since 2008. Even more disturbing: there’s no consensus as to why the overnight repurchase rates skyrocketed, other than references to a “stressed market”.
September 2019: Consumer confidence is pretty much all that is keeping the U.S. economy afloat. We may be sinking. As per the highly-regarded and highly-respected Michigan University Consumer Confidence Survey: “The Consumer Sentiment Index posted its largest monthly decline in August 2019 (-8.6 points) since December 2012 (-9.8 points)” The retaliatory China tariffs are one factor. Another one is the drop in July’s personal income growth. Bottom line: personal incomes rose just 0.1%, the smallest gain in 10 months. All of the tell-tale signs are there.
September 2019: When will we know if we are in a recession? We won’t…..until we are six-months into it. Here’s the deal: an economic recession is defined as two consecutive quarters of economic decline, as reflected by GDP. Recessions are officially declared in the U.S. by a committee of experts at the National Bureau of Economic Research (NBER), who determines the peak and subsequent trough of the business cycle which demonstrates the recession. So can pretty much guarantee that in 2020, there’ll be a lot of pressure on the NBER not to use the “R” word during the election cycle. So even if we are in the midst of a recession, it’s unlikely to be officially declared until after the November 2020 election. The official GDP statistics can be tracked at the Federal Bureau of Economic Analysis, although the data runs 2-3 months behind. As of June 30th, U.S. GDP had dropped from 3.1% to 2%.
August 2019: Long-term Treasury rates added to their monthlong slide this month, aggravating a key yield-curve inversion and sending the 10-year yield to its lowest level against the 2-year rate since 2007. Why is the 5-month long bond inversion such a big deal? As a general rule, long-term U.S. government bonds offer higher yields than short-term ones, because buyers demand higher interest rates in return for locking up their money for greater periods of time. When bonds are offering higher yields for short-term money, it means that the lending market for short-term loans has dried up. In short, lenders see something on the near-term horizon that they don’t like……..like a recession. Based upon over 50 years of financial history, when short term bonds are offering higher yields than long-term, then a recession is in the offing……within a year, if not sooner.
August 2019: Remember that jump in employment figures from 2018. Turns out it was a figment of the government’s imagination. The truth came out, about six months later. The economy had about 501,000 fewer jobs as of March 2019 than the Bureau of Labor Statistics initially calculated in its survey of business establishments. That’s the largest revision since the waning stages of the Great Recession in 2009, according to Marketwatch. What remains to be seen is whether the lower employment figures end up showing that wage growth was a lot stronger in the past year than government figures now tell us. In light of the manufacturing recession that has been largely documented, the likelihood of hiring increases is highly unlikely.
August 2019: Will the U.S. be immune from the recession already hitting other countries? The U.S. economic picture will largely be driven by whether consumer spending slows. Early indicators suggest consumers are getting skittish. CNN reports that hiring by employers has already slowed by about a quarter this year compared to the same time last year. If businesses pull back on hiring more, unemployment could start to rise. The sale of cars and homes — big-ticket purchases that are good barometers of spending — are also weakening. Both fell about 2% in the first half of 2019 over the same period last year, notwithstanding low interest rates. As per Moody’s Analytics Mark Zandi: “…. if American households waver in their spending, it’s game over — we’re in a recession.”
August 2019: U.S. manufacturing has been in a recession for the last 6 months. The Institute for Supply Management’s Purchasing Managers’ Index, a closely watched measure of manufacturing health, has fallen to just above recession levels. This finding was supported by Markit’s PMI analysis that showed new orders received by manufacturers dropped the most in 10 years, while the data also showed export sales tanked to the lowest level since August 2009. Growth in core capital goods orders, a leading indicator of capital spending, has all but stopped growing. Job growth in goods-producing industries has dropped to just 1%. Currently, consumer spending is one of the only things keeping the U.S. economy afloat. Globally, the manufacturing outlook is even worse. China only had 4.8% industrial production growth in July — which is the country’s the weakest growth rate since February 2002. America’s growth is only the weakest since February 2017. Germany is also doing poorly — its yearly growth rate was -5.2% which missed estimates for -3.1% and was the weakest reading since the financial crisis.
August 2019 The Trump Slump is for real. Of the 226 economists surveyed by the National Association for Business Economics, a staggering 98% of them foresee a recession in the next two years. They are evenly split on whether the recession will begin in 2020 or 2021. Notably, only 5% predicted a comprehensive China trade deal; 64% see a superficial agreement. A majority of them see the trade uncertainty as accelerating the onset of a recession.
August 2019: Bankruptcy rates are a key indicator of a coming economic downturn. So, not surprisingly, bankruptcies have been surging in 2019. US bankruptcy filings surged by 3 percent in July 2019 from July 2018. This trend is expected to continue – this year’s overall total of bankruptcies is on pace to hit 796,000, far exceeding the 777,000 for last year. Meanwhile, record American household debt, near $14 trillion including mortgages and student loans, is some $1 trillion higher than during the Great Recession of 2008. Credit card debt of $1 trillion also exceeds the 2008 peak. More notably, Baby Boomers are the ones leading the bankruptcy surge. The Financial Times reports that Americans over 65 years old made up just 2% of people filing bankruptcy in 1991, but that figure rose to more than 12% by 2016. The primary culprit appears to be credit card debt. The most recent Federal Reserve survey of consumer finances, reveals that whereas only one in five Americans 75 or older was in debt in 1989, twenty-five years later almost half were in debt.
August 2019: Reuters reports that in past recessions the “typical” economic indicators usually fail to presage a downturn. The so-called leading indicators – labor market, factory shipments and interest rate spreads among others – haven’t been particular indicative. Currently, these indicators aren’t showing that a recession is looming, yet consistently whenever the Federal Reserve starts reducing rates, recessions aren’t far behind.
July 2019: The New York Times has weighed in on the coming recession. It has identified the economic indicators worth watching. It says that the unemployment rate, yield curve, manufacturing index, consumer sentiment, temp staffing, residential building and auto sales are some of the top indicators worth watching. With the exception of the unemployment rate, all of the other indicators suggest a recession is nearby, if not imminent.
July 2019: Elizabeth Warren is the first, but won’t be the last, presidential candidate to warn about the economy. Warren, who as a Harvard University law professor was among the earliest to raise warnings before the 2008 financial crisis, posted an essay detailing the troubling signals on the economic horizon. She cites household and corporate debt levels, the two quaters of manufacturing recession (see below) and the inverted yield curve as some of the more obvious signs. Regarding the debt levels, here’s some of the numbers upon which Warren relies: “The student debt load has “more than doubled since the financial crisis.” American credit card debt matches its 2008 peak. Auto loan debt is the highest it has ever been since we started tracking it nearly 20 years ago, and a record 7 million Americans are behind on their auto loans — many of which have similar abusive characteristics as pre-crash subprime mortgages. 71 million American adults — more than 30% of the adults in the country — already have debts in collection. ”
July 2019: Wall Street isn’t ready for the party to end, but corporate reality is making an unwanted partyguest. Corporate earnings have declined over the last two fiscal quarters, representing an earnings recession. An economic recession normally accompanies earning recessions, as companies whose profits are squeezed tend to pull back hiring and investment.
July 2019: More than just a recession………BlackRock Financial is warning of signs that slowing growth may be accompanied by increased inflation. The inflation that normally accompanies economic expansion has been mysteriously missing over the past decade. BlackRock suggests that its appearance has been delayed, but that it’ll be coming at a time when the economy is retracting. This sets up a worst-of-all-worlds scenario.
July 2019: The warning bells continue to ring. The probability of a U.S. recession predicted by the treasury spread hit 32.9% in July—the highest since 2009, according to the New York Fed. Although consumer confidence is still historically high, the most recent June consumer confidence index (released by The Conference Board every month) dropped to two-year lows, to 121.5. According to a Reuters report in May, factory activity dropped to near 10-year lows, sparking fresh concern. JP Morgan and Morgan Stanley both cut 2nd quarter GDP estimates to 1% from 2.25% and 1.9% from 2.2% respectively.
June 2019: Two indicators in the aviation industry may be pointing to a economic downturn: declining demand for air cargo and a “peak” in aircraft orders last year, according to the executive chairman of CAPA Centre for Aviation. Cargo demand is “typically seen as a forward indicator of not just the airline industry, but where the economy generally is heading. However, of late, demand for air cargo is declining fairly steeply.
June 2019: What do the top financil offers throughout U.S. corporations think about a coming recession? Nearly half (48.1%) of chief financial officers in the United States are predicting the American economy will be in recession by the middle of next year, according to the Duke University/CFO Global Business Outlook survey released this month. Read further and you’ll find that 69% of those same executives are bracing for a recession by the end of 2020. It’s no wonder that the Federal Reserve is expected to reduce interest rates next month.
June 2019: Axios reports that the country’s wealthiest individuals and companies are awash in cash. More to the point, the wealthiest class doesn’t see any lucrative investments. Even more to the point: when the wealthy begin to hoard cash, they do it because they see a recession in sight. Axios notes that “the Trump tax cut —exacerbated these issues, slashing the share of U.S. taxes that companies paid to its lowest level in at least half a century and provided companies even more capital for buybacks, dividends and executive compensation.” The country needs to worry when our wealthiest see few investment opportunities.
June 2019: May’s employment numbers were the worst since 2009. According to Moody’s and ADP, the increase in jobs amounted to only 27,000 new private-sector jobs. Compare this to April’s 271,000, and you understand the magnitude of the job growth collapse this past month.
June 2019: Trade wars! The Trump tariff trade tactics are wearing thin with international markets. CNN reports that the majority of economists polled believe a recession is coming in 2020. The poll found that the risk of recession starting in 2019 is only 15% but 60% by the end of 2020. About a third of the economists believe a recession will begin by mid-2020, despite the fact that recessions rarely occur in election years.
May 2019: A global manufacturing slowdown is now imminent. The U.S.-China trade war, slumping car sales and Britain’s stumbling European Union exit took their toll on manufacturing activity, according to Reuters. It reports: “Factory activity slowed in the United States, Europe and Asia last month as an escalating trade war between Washington and Beijing raised fears of a global economic downturn…”
May 2019: Anomolies in the bond markets have led investment bank Morgan Stanley to issue a “recession watch”. Many indicators are showing a slowdown in investment and production, but the bond inversion is an indicator that investor expectations are tanking. “when the yield on the benchmark 10-year Treasury yield first dropped below that of the 3-month Treasury bill, a sign many on Wall Street read as a recessionary signal.” Editors note: Morgan Stanley has been unerringly accurate over the past few years in its bearish forecasts. Now that it is turning bullish, it is worth continuing to monitor Morgan Stanley’s perspective.
May 2019: Personal income for US households is inexplicably dropping, and this is problem. Bloomberg reports that income peaked in December and has dropped in the 1st quarter of 2019. This might just be a data oddity, but for the fact that credit card issuers are preparing for a jump in consumer defaults by preparing for an increase in unpaid credit. Similarly, mortgage lenders report that delinquencies have been impacted by the reduced tax refunds issued by the IRS. All signs point to US consumers having less disposable income in 2019. That bodes poorly for an economy that is largely driven by domestic consumption.
April 2019: Bloomberg correctly asks whether the recent stock upticks is a “melt-up”. It points out that the 1999 dot-com bubble mirrors what we are currently seeing. Prices and trade volume soared, as investors rode the momentum, all the while, growth in earnings fell way behind growth in share prices. When it became obvious that the market fundamentals didn’t support the stock prices, the entire tech industry cratered. Billions in wealth were wiped out.
April 2019: Fortune Magazine makes a very useful contribution to interpreting the current market. It observes that “Market volatility has soared as relatively minor economic setbacks trigger frequent, dramatic selloffs. And over the past 12 months, at the same time that U.S. stock indexes have notched new records, mutual-fund shareholders have pulled out about $100 billion more from stock mutual funds and ETFs than they put in—a sign of mounting unease among Main Street savers.” It identifies five market indicators to watch: three of which suggest recession. The other two (China consumer spending and corporate profits) are less clear.
March 2019: NYT columnist David Leonhardt has begun drumming to the Recession drumbeat with observations about economic forecasters. In two words: they’re wrong. He notes that Federal Reserve officials have repeatedly overestimated how quickly the economy would grow. Since 2010, they’ve continually revised forecasts downward, only to discover that they didn’t go far enough down. As investment funds continue to dry up and household savings rates increase, there’ll be little left to prime the economic pump.
March 2019: The big R is coming into focus and its not a pretty sight. Forbes Magazine — not known for Chicken Little warnings — suspects a recession has probably already begun. The combination of a global retraction and weakening U.S. data suggests that 2019 could be a tough year for investors. 2020 looks to be tough on workers who’ll be subject to layoffs and wage stagnation.
February 2019: The gap between 1- and 5-year yields turned negative late last year, around the time when the Federal Reserve delivered its fourth interest-rate increase of 2018 and penciled in two hikes for 2019. The gap has largely been inverted ever since, plummeting to as low as minus 18.8 basis points on Jan. 3, and trading around minus 7.3 basis points Monday. Bloomberg reports that the curve out to the 5-year yield may be as predictive as the spread to the 10-year because of the wide array of lending that occurs on terms of 5 years or less, including business, personal, auto, and construction loans
February 2019: More than three-quarters of business economists expect the U.S. to enter a recession by the end of 2021, though a majority still estimate the Federal Reserve will continue raising interest rates this year. Ten percent saw a recession beginning this year, 42 percent project one next year, while 25 percent expect a contraction starting in 2021, according to a semiannual National Association for Business Economics survey.
February 2019: Forecasters were blindsided by Commerce Department numbers showing U.S. retail sales, a key indicator in economic forecasts, suffered their worst decline in nine years. Estimates of December 2018 retail and food services sales, a major driver of the U.S. economy, fell 1.2 percent from the previous month, to $505.8 billion, as per the Census Bureau. This is the largest drop in retail sales since August 2009. As soon as this news hit, economic observers began slashing economic growth estimates. Some are hoping this is a error caused by the January gov’t shutdown. But insiders are already adjusting their outlooks.
February 2019: The national debt just hit a new and unprecedented record $22 trillion dollars. (trillion with a T) It stood at $19.95 trillion when President Donald Trump took office on Jan. 20, 2017. Trump campaigned on a pledge to wipe out the entire national debt; it appears, he’s accomplished the opposite. The last time the U.S. debt was this big was shortly after the end of World War Two, a period when the government spent enormous sums to prevail in World War II and rebuild Europe. While this undesirable milestone won’t threaten near-term impacts, it will haunt future lawmakers and government regulators who will find a crushing debt inhibiting future economic policy options.
February 2019: A canary singing? The Federal Reserve released data showing 7 million Americans are 90 days or more behind on their auto loan payments. This is the highest level of unpaid car loans in the 19-year history of the bank’s loan origination data……and worse than the 2008 Great Recession. There are now 1 million more people behind on payments by three months than there were in 2010 when delinquency rates were at their worst. Of greatest concern, is that most of the delinquencies can be traced to workers in their 30s…..the demographic that was supposed to be enjoying a robust economy. It turns out they aren’t. Says economist Austan Goolsbee: “it’s a warning sign”.
January 2019: Even more bad news…..consumer sentiment is dripping with pessimism. The University of Michigan released the January results for Consumer Sentiment and the index of Consumer Sentiment dropped from 98.3 in December to 90.7 in January. When Trump was elected the index was 93.8 and peaked at 101.4 in March last year. However, the post-tax-break hangover has finally sunk in. Small businesses are similarly gloomy. Vistage’s survey of over 1,000 small business CEO’s shows their optimism is dissipating. After hitting a high of 110.3 in December 2017 it has fallen for four straight quarters and tumbled from 103.0 in the September quarter to 95.4 in December. Says A. Gary Shilling, a red flag to notice is that in the last six quarters, consumer spending has grown faster than after tax income. Consumers reducing their savings rates to maintain their spending is not sustainable.
January 2019: In December, US existing-home sales cratered to 4.99 million, 10.3% below the mark from the year-ago period and the biggest drop in more than seven years. Mortgage servicing companies report an even more severe drop in new mortgage originations — the lowest in four years. These ugly housing numbers have raised concerns by analysts who are acutely aware that significant housing declines have foreshadowed 9 of the 11 post-World War II recessions in the US.
January 2019: A perfect storm? A number of reputable sources are raising serious concerns about how China’s dramatic economic slowdown, the economic impacts of the U.S. gov’t shutdown, uncertainty caused by Trump’s trade battles and notable profitability drops among major U.S. companies are accelerating the inevitable recession. Both J.P. Morgan and Pantheon Macroeconomics projects that if the shutdown lasts through March it could push first-quarter growth below zero. The White House’s Council of Economic Advisers, said this week that the shutdown impact would be roughly double what it originally anticipated. That could push first-quarter growth below 2 percent. And, according to Politico, analysts are rushing out warnings that missed federal paychecks, dormant government contractors and shelved corporate stock offerings could push first-quarter growth close to or even below zero if the shutdown, which is wrapping up its fourth week, drags on much longer.
January 2019: The bad news keeps on coming. The New York Times reports that Apple’s downgraded stock advisory led to a market sell-off, was just one of several warnings from major companies. This was followed by several large banks as well as Netflix, UnitedHealth and Delta Air Lines experiencing sell-offs. Yesterday, Citigroup reported quarterly revenue of almost half a billion dollars less than analysts had expected, saying economic uncertainty had hurt its trading business. Don’t overlook the impact that the pending Federal Government shut-down will have on the economy. The destabilizing impacts will be felt for the remainder of 2019. Among other things, economic data relied upon by investors will be unavailable due to the Commerce Department shut-down.
January 2019: The stock market’s volatility speaks volumes. China’s economic retrenchment (and Apple’s confirmation of it) speaks volumes as well. But perhaps the most compelling insight comes from recently-retired Governor Jerry Brown. In an “exit” interview with the New York Times, the capable manager of the world’s fifth largest economy said what most insiders pretty much know: “the recession has probably already begun.” It’s probably no longer a matter of whether….or when.
December 2018: From the New York Times: about 47.3 percent of the economists surveyed by the WSJ said the continuing conflict between the U.S. and China was the biggest economic risk of 2019. About one in five cited disruptions in the financial markets as their biggest worry, and 12.7 percent were most worried about a slowdown in business investment. Over half of the economists polled by the WSJ expect a recession to start in 2020, and slightly more than one in four expect it in 2021. Just one in ten expect a recession next year. Economists surveyed by Reuters put the chances of a recession in the next two years at 40 percent; Pimco has put the odds of one next year at 30 percent.
December 2018: The bad news continues to pile on. JPMorgan sees a 35 percent chance of a recession next year, close to the highest probability in the current cycle. Globally, UBS studied 40 countries over about 40 years and found the U.S. to be among those currently behaving in a way inconsistent with prior peaks. Bank of America is noting troubling signs in auto sales, industrial production, the Philadelphia Fed index, and aggregate hours worked. But perhaps the most disturbing news came from former Federal Reserve chief Janet Yellen. Janet Yellen told a New York audience she fears there could be another financial crisis because banking regulators have seen reductions in their authority to address panics and because of the current push to deregulate.
December 2018: As per the New York Times: “Overall, stocks are down 1.5 percent this year, after hitting dizzying heights in early October. Hedge funds are having their worst yearsince the 2008 crisis. And household debt recently hit another record high of $13.5 trillion — up $837 billion from the previous peak, which preceded the Great Recession.” Its observation is based on four big factors:
- Student Debt
- China Trade War
- Increased interest rates
- Italexit, following a very messy and unresolved Brexit
It’s conclusion: The anxiety that we could be in for a replay of 1929 — or 1987, or 2000, or 2008 — has become palpable for any American with a 401(k).
December 2018: The 3-year Treasury yield Monday moved above the 5-year yield, and it was soon followed by the 2-year. When shorter-term interest rates this week start to move above some longer-term rates, a recession could be close by. It happened in 1990, 2001 and 2007, and 2019 appears to be following that worrisome pattern. A number of bond market observers have noted this phenomenon.
December 2018: Millennials are poor and they are weighing down the consumer sector. In a paper issued by the Federal Reserve, the bank regulator found that millennials are less financially well-off than members of earlier generations when they were the same ages, with “lower earnings, fewer assets and less wealth.” Because of the 2008 recession, this age group has “attitudes toward saving and spending” that might be “more permanent for millennials than for members of generations that were more established in their careers and lives at that time,” according to the study. The result: they spend less on cars, homes and many consumer goods. Casual dining, home improvement, banking, designer clothes and a host of other retailers have been forsaken by this generation that is economically hobbled by student loans, higher medical costs and lower average wages. Notably, this trend is not going to end anytime soon.
Movember 2018: The US stock market is a bear…..according to Morgan Stanley. The investment house issued a report to its investors indicating that it believes the markets have entered bear territory. Noting that more than 40% of the S&P 500 stocks are down at least 20%, despite better-than-expected profit results by most of those companies. The Wall Street firm predicts domestic GDP growth will slow to 2.5% in 2019 and 1.6% in 2020. But its most notable statement is: “….. market corrections have “rarely” gone on to become all-out bear markets absent a recession within 12 months.” So if this isn’t a “correction”, then recession looms. In just the last few weeks, more than $3 trillion has been lopped from U.S. equity values.
November 2018: The US trade disputes and its governance uncertainty is starting to take a toll on the international economy. The International Monetary Fund has revised its forecasts downwards, attributing the darker prediction to U.S-China trade war was taking a toll and credit/debt problems in emerging markets. The Fund cited a “……confluence of factors, including the introduction of import tariffs between the United States and China, weaker performances by eurozone countries, Britain and Japan, and rising interest rates that are pressuring some emerging markets with capital outflows, notably Argentina, Brazil, Turkey, South Africa, Indonesia and Mexico.” However, it also noted that the economic stimulus of the 2018 tax cut will begin to wane.
November 2018: More warning signs from credible economic analysts. Axios reports the third quarter marked the “32nd straight quarter of yearly growth below 2%, a long and consistent stretch of anemic growth that hasn’t happened before in the post-World War II era,”a contraction in the manufacturing of metal products for the first time in two years probably due to President Trump’s multi-front trade war and that rather than investing in new capacity, companies putting their excess earnings into stock buybacks, possibly reaching as high as $1 trillion. This probably explains why in the most recent quarter, business investment growth slowed to 0.8% from 8.5% in the second quarter, and 11.5% in the prior quarter. GDP growth retreated to a 3.5% annual rate, down from 4.2% the prior quarter. Going forward, economists expect growth to hit 2.9% in the fourth quarter, and 2.5% in the first quarter of 2019. Mark Yusko, founder of hedge fund Morgan Creek Capital, is quoted as forecasting a recession in 2019 “……and puts the odds at 100% — thanks to trade tensions.” For more details about a coming recession, check out this analysis which focuses on the yield curve. It tracks the spread of the 10-year Treasury Bond yield and the 2-year Treasury Bond yield and shows the spread narrowing. The conclusion: an upcoming recession is highly indicated.
October 2018: US GDP growth is forecast to drop over the next two years. After enjoying U.S. GDP growth having risen to 3.1 percent in 2018, it is predicted to drop to 2.5 percent in 2019, and 2.0 percent in 2020. That’s according to the most recent forecast released at the Federal Open Market Committee meeting on September 26, 2018. This forecast is echoed by The Conference Board, an independent nonprofit economic analysis organization. The Wall Street Journal’s survey of economists suggest the GDP drop could be even larger.
September 2018: Martin Feldstein, former economic adviser to the Reagan Administration and current president of the US National Bureau of Economic Research, is ringing alarm bells about the economy. He warns that the next bear market risks causing a $10 trillion crash in the US housing market that could lead to a downturn to rival the Great Depression of the 1930s. His primary concern is that regulators don’t have the financial tools to deal with the impending crash. But he notes in an interview that a spike in 10-year Treasury yields would be likely to trigger a bear market. He cites a “decade of very low interest rates and fiscal stimulus by the US Federal Reserve has pushed Wall Street equities to a breaking point and no longer look anything like historical fundamentals”.
September 2018: Emerging markets are facing very serious economic headwinds. This economic crisis has engulfed countries across the globe — from economies in South America, to Turkey, South Africa and some of the bigger economies in Asia, such as India and China. A number of these countries are seeing their currency fall to record levels, high inflation and unemployment, and in some cases, escalating tensions with the United States. For example, recently Argentina informed the International Monetary Fund (IMF) that it needed an emergency loan; the country saw its currency fall by more than 50 percent against the dollar and its interest rates go up by a whopping 60 percent. Turkey’s economy is struggling mightily and may be unable to pay off massive debt. The latest data from the Institute of International Finance shows that debt in emerging markets including China increased from $9 trillion in 2002 to $21 trillion in 2007 and finally to $63 trillion in 2017.
August 2018: Economists polled by Salon are increasingly pessimistic about the short-term future. Some see a recession caused by the Fed over-reacting to a temporary uptick in the inflation rate. Economics also cite trade wars, chronically unemployed workers left behind by technology, over-stimulus of markets caused by the 2017 corporate tax cuts and excessive debt among emerging nations. The New York Times conducted a similar analysis and found the same; trade wars, debt bubbles and higher interest rates are all cited by increasingly sleep-disturbed economists. John Hussman, who has forecast both the 2000 and 2008 market collapses, has publicly shared his deep concerns about stock market valuation. He anticipates a significant (50%+) drop in U.S. market averages due to rising interest rates and increasingly reluctant investors.
July 2018: The housing market is causing major concerns. Home sales have declined in four of the past five months as housing prices have grown — but paychecks have remained stagnant. This scenario has trigger previous recessions. Combined with high consumer debt, increasing interest rates and inadequate personal savings, all of the signs are pointing to recession, according to Stifel chief economist Lindsey Piegza. Data from Southern California echoes Piegza’s fears. Southern California home sales hit the brakes in June, falling to the lowest reading for the month in four years. Sales of both new and existing houses and condominiums dropped 11.8 percent year over year, as prices shot up to a record high, according to CoreLogic. In the past, California, one of the largest housing markets in the nation, has been a predictor for the rest of the country.
June 2018: In January, we assessed the reliability of the unemployment numbers. Six months later, increasing ominous signs suggest that American adults are dropping out of the workforce due to social and economic ruptures of an alarming scale. According to Quartz, despite this being the longest US economic expansion on record, a smaller share of workers aged 20 to 54 are currently in the workforce than when the last recession began, in Dec. 2007. Worse yet, only 62.7% of working-age Americans have jobs or are actively trying to find one. (That’s about the same as in the late 1970s, before women joined the workforce en masse.) Bottom line: almost 40% of U.S. workers have given up on finding a job. Economists continue to be concerned about how a booming economy could create a large class of prime-age adults who have given up looking for a job. Most notably, former Federal Reserve Chair Janet Yellen admitted a lot of workers are part-time and would prefer full-time work. Some people have been out of work for so long that they’ll never be able to return to the high-paying jobs they used to have. Structural unemployment has increased. According to The Balance, these traits are unique to this recovery. You’ll recall our earlier blog where Yellen admitted that the real unemployment rate is more accurate. It’s double the widely-reported rate.
May 2018: An article by Axios is required reading by anyone trying to understand the American economy. Titled “The Coming Wage Crisis‘, Axios observes that flat wages and not a lack of jobs will be plaguing the U.S. in the medium and long-term. In April 2018, it notes that unemployment fell to 3.9%, but two-thirds of U.S. jobs pay less than $20 an hour. And the three most-common jobs, held by 11.5 million people, pay much less. The Axios article is bolstered by a recent study released by The United Way. The nonprofit found that more than 40% of U.S. households can’t pay the basics of a middle-class lifestyle — rent, transportation, child care and a cell phone. Even more chilling: Over 34.7 million U.S. households live above the official poverty line but below the cost of paying ordinary expenses. This is more than double the 16.1 million who are in actual poverty. Because of an aging workforce and loss of industrial jobs, Morgan Stanley’s chief United States economist observes that 3.9 percent rate today doesn’t suggest as tight a labor market as 3.9 percent in 2000 or 3.9 percent in the late 1960s.
May 2018: U.S. consumers are turning into hoarders? Moebs Services, an economic-research firm analyzed over 12,000 depository call reports and compared them to the Federal Reserve monetary data for 2017. Its findings: the average American consumer checking balance has increased in 23 of the past 30 quarters. This is meaningful because in bumper times, Americans feel confident by keeping little in checking. But when confidence in the economy is uncertain, consumers store money in checking accounts, effectively pulling back on spending. The culprits are low-wage jobs and an unwelcoming job market. Immediately prior to the 2008 Great Recession, U.S. households averaged less than $1,000 in their account. As of April 2018, the average checking account customer has more than $3,700 stashed away. The median amount in checking accounts since 1991 is $2,263. “Anything lower than this signifies the economy is doing well,” the Moebs study claims. “Anything above this indicates the economy is not doing well.”
May 2018: The Federal Reserve is issuing muted warnings about an upcoming economic downturn if interest rates continue to climb. The yield curve, a measure of short-term and long-term US Treasury bond rates, is flattening as investors prepare for the Fed to raise interest rates to keep the economy from overheating. Some economists fear the curve could tip over and invert if the Fed slams the brakes too quickly. “I am getting concerned about the flattening yield curve,” St. Louis Fed President James Bullard told CNN. Notably, the curve inverted before the 2018 recession a decade ago and before a shorter recession in 2001.
April 2018: Despite signs of a robust consumer market, US fast-food retailers are pointing to signs of slowing consumer demand. Reuters reports that “dollar menu” deals are booming in most fast-food restaurants. Economists surveyed by Reuters estimate consumer spending growth braked to below a 1.5 percent rate, which is the slowest pace in nearly five years and follows the prior quarter’s robust 4 percent growth rate. An insider study explains that value menus are here to stay. Short term: bad food is going to be cheaper. Longer term: Profitability in fast-food operations will be hurt.
April 2018: In the midst of Trump’s full-frontal attack on federal regulation comes an eye-opening analysis which finds that a troubling trend of declining dynamism in the U.S. since 1980—along with wage stagnation, rising inequality, and a host of other ills—has no connection to regulations. In fact, the culprit appears to be a rise in monopolization or market consolidation. New York Times columnist Eduardo Porter described it in a February 2018 article: “By allowing an ecosystem of gargantuan companies to develop, all but dominating the markets they served, the American economy shut out disruption. And thus it shut out change.” This monopolization trend can be traced back to the Reagan Administration efforts to scale back enforcement of antitrust law. As noted recently by the Washington Monthly, the loss of economic dynamism is a consequence of deregulation, not overregulation. And it has disturbing ramifications for the U.S. long-term economic health.
April 2018: How have Trump’s threatened trade wars and Facebook’s data debacle affected the stock markets? Since February 2018, the Dow Jones has lost 12% of its value (over 3000 points), erasing all of the gains from the first two months of 2018. The S&P 500 and NASDAQ have fared just as poorly; both exchanges have lost over 300 and 700 points respectively (11%) during the last two months, as per Trading Economics.
March 2018: U.S. retail sales fell for a third straight month in February as households cut back on purchases of motor vehicles and other big-ticket items, prompting analysts to downgrade their first-quarter economic growth forecasts. Because consumer purchases account for almost 2/3 of the U.S. economy, drops in retail sales has a magnified impact upon the economic outlook. It was the first time since April 2012 that retail sales have declined for three straight months. This decline is even more troublesome given that plenty of consumer confidence measures continue to post sky-high readings and the stimulus of Republican tax reform should have begun to stimulate consumer demand. Notably, a potential canary in the economic coal mine might be big box retailer: Home Depot. Marketwatch notes that some cracks have started to appear in Home Depot’s stock. And increasingly, it looks like there could be serious structural problems brewing for the consumer sector more broadly. Marketwatch also notes that the number of previously owned homes on the market at the end of 2017 had dropped by 11% to just 1.48 million units nationwide, the lowest since the National Association of Realtors began tracking data. That’s a bad sign for housing in general considering that existing homes represent about 9 out of every 10 transactions. It might also explain why Home Depot’s stock declined of about 13% from all-time highs in January despite very strong earnings.
February 2018: Ray Dalio, chairman of hedgefund Bridgewater Associates, who accurately predicted the 2008 recession. In a recent appearance at the Harvard Kennedy School’s Institute of Politics he projected the probability of a recession prior to the next presidential election as “70% or something like that.” His thinking is based upon his belief that the U.S. economy is in a “pre-bubble stage,” but warned it could quickly morph into a bubble — “followed by a bust”. Dalio isn’t a lone wolf on the coming recession. S&P Global Ratings wrote in a recent report that the recovery has a “good chance” to stay alive until the summer of 2019. Guggenheim Partners, a New York-based investment firm, predicted last month that the next recession “will occur by the end of 2019 or 2020.” Seventy percent of investors polled by Bank of America Merrill Lynch this month believe the global economy is in “late cycle” — the highest percent since January 2008.
February 2018: Add Morgan Stanley to the list of 2018 market pessimists. In a report, the investor firm wrote that the February stock correction was only an appetizer. Although higher bond yields pushed stock prices lower, apparently the key metric of inflation-adjusted yields didn’t break out of their range for the past five years, Relatively low real yields have been propping up stock values. But if stocks must now rely on earnings — not multiple expansion — to drive them higher, then Morgan Stanley projects that a slowdown may loom starting in the second quarter of 2018. “It’s when growth softens while inflation is still rising that returns suffer most,” the strategists wrote. “We remain on watch for ‘tricky handoff’ in the second quarter, as core inflation rises and activity indicators moderate.”
February 2018: Not surprisingly, stock markets around the world “corrected” in dramatic fashion. That got a lot of attention. What didn’t get much attention was some of the observations about the fragility of stocks in international and national stock exchanges. Investor Carl Icahn was unsparing in a CNBC interview: he warned that investors have exposure to “way too many derivatives” and called the stock market’s nosedive just “rumblings of an earthquake.” He added: “investors should not use the markets like a casino. “… that’s a huge mistake. This casino is on steroids.” If you plan on any stock investments in 2018, his interview on CNBC is required viewing.
February 2018: Bain’s Macro Trends Group has painted a disturbing picture of a generational divide that is all but inevitable in the next 10 years or so. It reports: “collision of these forces could trigger economic disruption far greater than we have experienced over the past 60 years.” It documents how the U.S. population is aging fast, and many older workers are staying on the job longer. With the labor force shrinking and needed skills hard to find, companies will rapidly automate. 20%-25% of current jobs will be wiped out, adding up to some 40 million workers, many in the least-advanced positions, often millennials. It concludes that the coming transformation will test leadership teams profoundly. Automation will reshape national economies, throw labor markets into turmoil and change the rules of the game in many industries. Aging populations will strain social systems as never before.
January 2018: If you love to purchase bonds, you should note that the U.S. Citi Economic Surprise index — the rate at which data exceeds analyst expectations — has started to fall after reaching a five-year high in December. Reality will catch up to interrupt the widespread investor optimism and strong bullish trends imbuing nearly every corner of financial markets according to Canaccord Genuity Inc. December 2017 was only the fifth time since 2003 the economic-surprise index peaked above 75. From each peak to the corresponding trough, 10-year yields on average dropped 1.11 percentage points over the next seven months, according to data compiled by Canaccord. Bottom line: This analysis suggests that if history is any guide, the markets are about to get a double whammy of stock price volatility and plunging Treasury yields.
January 2018: If you don’t know who David Rubenstein is, you should check him out. A highly regarded financier, co-founder of Carlyle Group and an outspoken observer of all-things-economic. His recent concerns, voiced while attending the Davos Summit, is required reading by any serious investor. His bottom line: “…the conventional wisdom is that we have no recession problems around the world, that everybody’s doing quite well … The conventional wisdom is usually wrong…” He went on to warn about high government debt, (“At some point, people are going to wake up and say the U.S. government has $20 trillion dollars of debt and unfunded liabilities that are hard to fathom.”) and geopolitical uncertainty. At Davos, many attendees are reported to be concerned about whether skyrocketing growth of market valuations and increased capital flows are a harbinger of the next crash. David Rubenstein seems to think so. Worth your consideration.
January 2018: The widely-promoted low unemployment rate in the US may be off by a almost 100%. It turns out that most US job growth is in low-paying retail and food service industries and that some workers have been out of work for so long that they’ll never be able to return to the high-paying jobs they used to have. That means structural unemployment has increased. Former Federal Reserve chief Janet Yellen considers the real unemployment rate to be more accurate. It’s double the widely-reported rate. So our advertised 4% unemployment rate is much closer to 8%. The misleading unemployment rate is one of the factors referenced by Morgan Stanley in its pessimistic outlook for 2018 and beyond: “bumpy roads ahead.” Worse yet, according to a report by the World Economic Forum and Boston Consulting, almost 1 million Americans will see their occupations vanish entirely in the next eight years. They will have to spend money to train for a wholesale career change and they’ll probably not find equally paid work. Not a pretty future for almost one million Americans.
December 2017: University of Michigan economists are concerned that the labor market is continuing to get tighter. The unemployment rate dipped to 4.1 percent and yet, the 12-month growth rate of average private hourly earnings seems to have gotten stuck below 2.8 percent. It worries that “The Federal Reserve has openly admitted that it does not completely understand what is driving the weakness in inflation……there is a puzzling lack of inflationary pressures despite tighter labor markets and higher output growth. “A federal government shutdown at the end of 2017, however, could be disruptive to the U.S. economy in the near term.”
December 2017: The value of the U.S. dollar has plunged compared to other currencies. Why would a booming economy be experiencing a noticeable drop in the value of its currency? It’s because currency traders who study markets view the U.S. dollar to be overvalued compared to other countries. The value of the dollar looked very good early in 2017, but has dropped over 10% in just 11 months. Trump’s legislative failures, combined with rejuvenated economic growth in Europe, have dealt a powerful blow to our currency. In fact, the dollar is in its first five-month losing streak since 2011. Sobering note: as of mid 2017, the Canadian dollar posted a new high against the U.S. dollar. $1US now is worth $1.24CAD, compared to the beginning of 2017, when that same $1US would have fetched $1.37 CAN. In 2016, the $1US would have been worth $1.45CAN. You’ll see the same loss of value as compared to the Euro, as well as a number of other Asian currencies. As of late January, U.S. dollar extended its recent rout to hit three-year lows while gold rose to its highest level in 1-1/2 years. Of greater concern, Trump’s Secretary of Treasury is quoted as saying that he “welcomed” the drop in the dollar’s value. Shortly after his comments, the dollar dropped even further.
December 2017: The CEO of low-end retailer Dollar General indicates that his company plans to build thousands more stores, mostly in small communities that have otherwise shown few signs of the U.S. economic recovery. He is quoted by the WSJ as saying: “We are putting stores today [in areas] that perhaps five years ago were just on the cusp of probably not being our demographic,” he said, “and it has now turned to being our demographic.” Dollar General caters to what it calls a “core customer” that is largely low-middle income. Dollar General’s gains reflect increasing losses for the American middle class.
November 2017: Vanguard Group (a major investment house) as publicly admitted to a 70 percent chance of a U.S. stock market correction. Vanguard’s research arm states that the current probability for a significant market correction is 30 percent higher than what has been typical over the past six decades. Vanguard is also telling its investors to expect returns in the “medium term” of 4 percent to 6 percent, the most cautious outlook it has had on future stock returns at any time during the post-financial crisis economic recovery. Vanguard isn’t alone: independent research also shows that the S&P/TSX Composite has a PE ratio of over 23, which is higher than that of the Dow Jones and well above the historical average, indicating that it could be overvalued.
November 2017: The Congress and Senate have passed a massive tax bill that features a massive corporate tax cut and individual tax breaks that independent analyses say would favor the wealthy while eventually result in a tax increase on middle-class Americans. In the long run, it promises to balloon the national deficit by over $1 billion and cripple Obamacare. A question to ponder: if the economy is as strong as our political leaders tout, why the need for a massive injection of capital targeted to U.S. corporations and upper-class individuals?
September 2017: Federal Reserve Chairwoman Janet L. Yellen said in a recent speech that the economic outlook is highly uncertain, suggesting that the central bank will proceed slowly in raising interest rates and scaling back easy-money policies. She expressed concerns that the Fed may have misjudged the strength of the labor market. Inflation has been running persistently below the Fed’s 2% target, puzzling economists and causing policymakers to be hesitant in raising rates. Yellen noted that the labor market, which historically has been closely linked to inflation, may not be as tight as the low unemployment rate suggests. The low rate of wage increases could indicate that the labor market has more slack than economists had believed.
September 2017 – Why is Berkshire Hathaway sitting on a record $100 million in cash. Warren Buffett says the “single best” way to tell if stocks are too expensive is to look at two simple numbers: the total value of all equities in the market and the total size of the economy. By this measure, the stock market is grossly overvalued. The value of all the equities in the Wilshire 5000 Total Market Full Cap Index (a proxy for the entire domestic market) stands at $26 trillion. That’s 135% of U.S. gross domestic product (GDP), according to figures tracked on a quarterly basis by the Federal Reserve Bank of St. Louis. That’s close to the percentage that existed just prior to our most recent market “corrections” of 2000 and 2008. The fact that Buffett is willing to hold so much of his company’s assets in cash is a testament to how few bargains he sees in this market. And that is not a good sign for investors heavily leveraged in equities.
August 2017 – Inequality of wealth continues to plague the U.S. economy. A paper. authored by the University of Chicago, finds that individuals in the bottom half of the income distribution have been shut off from economic growth since the 1980s. From 1980 to 2014, the average national income per adult grew by 61 percent in the US, but the average pretax income of the bottom 50 percent of individual income earners stagnated at about $16,000 per adult, while the income at the top for the top one percent went up by 205 percent. Compare this to France, where the bottom 50 percent of real, inflation-adjusted pretax incomes grew by 32 percent from 1980 to 2014. So in America the bottom 50 percent of pretax stagnated. In France it grew by 32 percent, which was approximately the same rate as national income per adult. Even though France has had slower growth, more of that wealth was distributed to the bottom 50 percent.
August 2017 – The Congressional Budget Office projected that the economy would grow just 2.1 percent this year, an increase from last year but far lower than Trump’s goals. It also predicted the economy would begin to slow in 2019 and 2020, growing only 1.6 percent in those years.
August 2017 – Home building has continued to lag. Builders have added just 849,000 new single-family homes this past year, well below the 2007 rate of 1,036,000. During past recoveries, the housing industry has jump started the rest of the economy. If we were following historical trends, the number of homes under construction per month would be 35% greater — along with the jobs that go with them. New construction has traditionally been a reliable source of middle-class jobs, but this economic recovery is different. The big fear: millennials can’t and won’t soon be able to afford new housing. A bigger fear: fewer new homes will lead to higher (and more unaffordable) housing in the coming decades.
July 2017 – An analysis by the Economic Innovation Group, a non-profit research and advocacy organization says that for the first time, U.S. companies are dying at a faster rate than they’re being born. Called “Dynamism in Retreat”, the report is a sobering look at how the gig economy is changing America’s economic equation: we aren’t losing jobs as much as we are no longer creating jobs. Axios Tech Editor Kim Hart notes that slow rate of business starts means the U.S. economy is powered by a narrowing segment of companies, people and geographies — making the overall economy less resilient than it was after previous recessions. And without competitive pressures from upstarts, big companies are able to grow bigger faster, increasing industry consolidation. America’s economic engine has historically been driven by small businesses. History may be changing.
July 2017 – Market power in the U.S. continues to be consolidated into a handful of large corporations. A study focused on market concentration and market power. It finds that companies across all industries in the US are charging more for goods even though the price to produce these goods has not changed. Thus, market prices aren’t driven by demand or supply as much as companies able to control markets through size and leverage. This bodes ill for long-term growth, as market power tends to depress innovation and market changes.
July 2017 – Adjusted nominal GDP growth in 2016 was just 2.95%. This makes 2016 the second-worst year on record since 1959. Some of the key drivers of this retraction is the bank lending is falling, corporate tax receipts dropped by the largest margin since 2009, and the flat yield curve revealed in May of this year. Also, signs are of a weak long-term labor force participation rate. That translates into about 30 percent of the US population not working, or actively seeking a job (Note: these workers may be the 30% of voters who currently support Trump). This may also explain why the American population grew at a tiny 0.7 percent last year, the lowest increase since the Great Depression.
June 2017: Moody’s downgrades Chinese debt for first time in 30 years. Given that the Chinese and American economies are extremely connected, the fact that the ratings agency downgraded China’s debt one notch from Aa3 to A1 is notable. China’s economy expanded at an official rate of 10.6 percent in 2010, but its more recent growth rate has been lower, 6.7 percent in 2016. Moody’s forecasts that over the next five years, the rate will continue to decline, falling to 5 percent.
June 2017 – According to a New York Times article (and confirmed by a number of other reliable sources) a survey released by Bank of America-Merrill Lynch found a cross-section of fund managers viewed China as the biggest potential source for an unpleasant surprise for global markets for the first time since January 2016. The investor services firm Moody’s also downgraded China’s sovereign credit rating last month, its first such move in 28 years. Global investors are very concerned about how China has resorted to pumping up credit, adding to an already mountainous pile of debt, in order to keep its economy humming. According to the Bank for International Settlements, that debt reached 257 percent of its gross domestic product at the end of 2016, slightly above the same measure in the United States, and significantly higher than the 184 percent for emerging economies over all.
June 2017 – The New York Federal Reserve released a new report that showed U.S. collective household debt balances totaled $12.73 trillion in March 2017, surpassing the 2008 peak of $12.68 trillion. Why is this a concern? Compared with 2008, fewer borrowers have housing-related debt — including their first mortgages, or home equity lines of credit — and instead more have taken on auto and student loans. In fact, student debt in 2017 is five times — 500% more — than it was in 2003. (Editor’s note: Student loans have made it harder for younger consumers to buy homes, thus explaining the drop in housing-related debt.) In fact, student loans are a whopping $671 billion higher — and about 10% of those loans are delinquent. Because student debt can’t be restructured or discharged in bankruptcy, it portends for a large segment of younger Americans will be struggling with debt that will weigh them down for the rest of their lives. This will prevent them from starting businesses, buying homes or saving for retirement! Another troubling trend: Older Americans are taking on a greater share of debt than in years past. Those ages 60 and older held 22.5% of total household debt in the fourth quarter of 2016, compared with 15.9% in 2008 and 12.6% in 2003. Normally, this sector reduces debt as it enters a retirement phase. But in 2017, credit card debt and auto loan debt balances for people ages 60 and older have risen, meaning seniors are relying less upon their savings and more upon credit that they may not be able to payback later. The last troubler: $1.1 trillion in auto loans, subprime loans packaged into asset backed securities are getting crushed by net charge-off rates that are worse than during the Financial Crisis.
May 2017 – Life insurer and financial services provider Northwestern Mutual found that 45% of Americans that have debt spend “up to half of their monthly income on debt repayment.” Excluding mortgage debt, American carry an average debt of $37,000. Of them, 47% carry $25,000 or more, and more than 10% carry $100,000 or more in debt, excluding mortgage debt. While most of them expect to get out of debt before they die, 14% expect to be in debt “for the rest of their lives. This is a concern because credit card debt is about to get more expensive; note the soaring net charge-offs at Capital One, Synchrony, and Discover. If U.S. consumers are cut-off from cheap debt and are forced to live within their means and paying off debt as they go, the U.S. and global economy would take a bit hit.
May 2017 – U.S. durable good orders have dropped…..a lot. Orders for durable goods — items meant to last at least three years — slid 1.1% in May, the Commerce Department reported — the most in 18 months. Business investment in new equipment jumped in the January-March quarter but has leveled off since then. Orders for capital goods, excluding aircraft and military equipment, slipped 0.2% last month, a sign businesses are trimming their spending.
May 2017 – the 10-year U.S. Treasury note was trading at a yield of 2.25 percent per year, while the two-year note yielded 1.28 percent per year. At 0.97 percentage point, the “spread” between the longer-maturity note and the shorter-maturity one is hovering at the lowest levels seen since October. This suggests that the bond market isn’t seeing any economic expansion. While this isn’t an inverted yield curve, which precedes most recessions, it indicates little hope in the markets for a sustained economic expansion.