THE LAST STRAW IN A RECESSION WATCH?

On Thursday, May 11, I saw an interesting segment on CNBC with hosts Sara Eisen and Carl Quintanilla interviewing David Rosenberg of Rosenberg Research.  As an economist, I was most interested in the part of the interview covering the possibility of a recession in the United States in the near future.  If I understood David Rosenberg correctly, companies in the U.S. are already in an earnings recession.  At least in David Rosenberg’s view, the U.S. has a credit driven economy.  David Rosenberg emphasized that it usually takes a while for the official start of a recession after the Federal Open Market Committee (FOMC) of the Federal Reserve System starts to increase interest rates and that people may not know that the economy has entered a recession when one starts.  In fact, his memory is that people in the summer of 2008 were still forecasting a soft landing while the U.S. economy had already entered into a recession in December 2007 according to the National Bureau of Economic Research (NBER).  I think he said earlier that recessions can catch up on people before they realize it or sneak up on people or something like that.

Sara Eisen pointed out that with an unemployment rate of 3.4 per cent, the job market appears strong, and that has helped households to spend.  David Rosenberg however observed that the unemployment rate is a lagging indicator and that the changes in initial jobless claims have already risen approximately 90 per cent of the increase usually concomitant with the start of a recession.  Moreover, he mentioned that the index of aggregate hours worked reached a maximum in January 2023 and has been less than that level since then.  Thus, he concluded that the U.S. job market actually peaked in January.  The seasonally adjusted data on the Saint Louis Federal Reserve Bank FRED website compiled by the U.S. Bureau of Labor Statistics (2023, a) support David Rosenberg's statement.  Near the end of the segment, Carl Quintanilla pointed out that some are forecasting decreases in U.S. nonfarm payroll employment coming soon.

Related to this discussion of data both supporting and contradicting U.S. recession concerns, I would like to add a brief discussion of the difference between seasonally adjusted data and data not adjusted.  On a seasonally adjusted basis, monthly total nonfarm payroll employment from the U.S. Bureau of Labor Statistics (2023, b) has increased most months starting with May 2020 and reached an all-time high in April 2023.  However, the same series from the U.S. Bureau of Labor Statistics (2023, c) but measured on a not seasonally adjusted basis increased by a relatively large amount, very roughly 900,000 jobs, but was below its levels from November 2022 and December 2022.  This may be typical in that employment may surge due to the holiday season shopping in November and December, then plummet in the largely colder post-holiday months of January and February, and then surge again in March and April as the weather heats up.  But if actual unadjusted data for total nonfarm employment is below its levels in November and December 2022, does that support the similar view that the U.S. labor market peaked in January 2023? However, on a basis not seasonally adjusted, data compiled by the U.S. Bureau of Labor Statistics (2023, d) have data from April 2023 surging to a level equal to that from November 2022 but below the level from October 2022.  In that sense, is aggregate employment rebounding?

I should also note that the above nonfarm payroll employment data may be based on the birth death model which makes assumptions about the number of new establishments starting operations and the number closing.  Recall that related to data for 2022, revisions to data from the U.S. Bureau of Labor Statistics (2023, e) implied that the U.S. economy actually lost more than 275,000 iobs (at least in the private sector) in the second quarter of 2022.  I don’t know if those revisions are reflected in the data available on the FRED website.  Further, data from the U.S. Bureau of Economic Analysis (2023) for real GDP show that U.S. real GDP fell in the first and second quarters of 2022.  If both real GDP and employment fell in the second quarter of 2022 and real GDP also fell in the previous quarter, then does that imply that the U.S. was in at least a very short term recession?

A diagram on the FRED website of the Saint Louis Fed based on data from the U.S. Bureau of Labor Statistics (2023, f) shows that the seasonally adjusted labor force participation rate has settled into levels below where they were before the COVID-19 shutdowns and even further below levels since some point in the late 1970s.  Is this due to accelerated retirements?  Are there discouraged workers who gave up seeking employment?  The lower labor force participation rate could help to explain the low unemployment rate because the not seeking employment within a certain time period are not counted as unemployed.

I have been mentioning in at least some of my previous blog posts that seasonally adjusted U.S. retail sales (including food services) have fallen five out of the last seven months based on seasonally adjusted data from the U.S. Census Bureau (2023).  Combined with observations from at least one of my previous blog posts about the level of withdrawals from retirement savings plans and delinquencies on loans (Check my blog post Hartman (2023) for more specific information and citations.), how strong is the U.S. consumer and will the strength continue?

Many are suggesting that the FOMC will not consider interest rate cuts in the year 2023 unless the U.S. economy slows dramatically.  Given the possibility that fiscal policy could also tighten considerably with spending cuts and a possible federal government default (which by the way really should not happen), I have difficulty seeing a positive economic surge in the very near future.  Maybe a positive aggregate supply shock could occur and keep the U.S. economy out of a recession.  I am optimistic about the impact of nuclear fusion on the economy.  However, at this point, it looks like widespread use of fusion for generating energy is probably at least a few years away.  Therefore, it’s unlikely that a positive AS shock like the widespread dissemination of fusion in electricity generation (and perhaps other energy generation) will be able to keep the U.S. out of a recession in the very near future. 

Also, let’s remember the yield curve.  An inverted yield curve, where the interest rate on a debt instrument with a longer term to maturity is less than the interest rate on debt from the same issuer (or maybe a borrower with the same credit rating) with a shorter term to maturity, is one of the best predictors of a recession coming soon.  In fact, Bauer and Mertens (2018) found an inversion of the one-to-ten-year U.S. Treasury yield curve to be highly reliable in forecasting U.S. recessions in the sample period that they used.  At least a few measures of the U.S. Treasury yield curve have been inverted for a while now, so that does not sound promising in terms of the U.S. economy avoiding a recession soon. 

So far in this post-COVID-19-shutdown era, the U.S. economy has avoided slipping back into a situation where the NBER would declare the U.S. economy to be in recession.  In part remembering what David Rosenberg said about soft landing beliefs in the summer of 2008, will there be a straw that breaks the camel’s back if the straw has not already found its way there?  Or will the economy get ‘over the hump’ (pun intended) of the slowdown in growth and avoid a recession?  If David Rosenberg’s observation is correct, then we won’t know whether the U.S. economy has experienced ‘the last straw’ for a while.

 

Please realize that subsequent data revisions may change the above analysis.  I apologize in advance for any misstatements, misunderstandings, inconvenience, and/or confusion.

 

REFERENCES

 

Bauer, M. D. and Mertens, T. M. (2018). "Economic Forecasts with the Yield Curve." March 5, 2018. FRBSF Economic Letter. 2018-07. Available online at:  https://www.frbsf.org/economic-research/publications/economic-letter/2018/march/economic-forecasts-with-yield-curve/ 

Hartman, Harrison C.  (2023)  Will Food for Thought Feed the Fed While People Try to Feed Their Families?  Posted January 29, 2023 online at the internet address below.

https://harrisonhartman.blogspot.com/2023/01/will-food-for-thought-feed-fed-while.html

 

U.S. Bureau of Economic Analysis (2023) Real Gross Domestic Product [GDPC1], retrieved from FRED, Federal Reserve Bank of St. Louis; https://fred.stlouisfed.org/series/GDPC1, May 12, 2023.  Note that the data were accessed from the internet address below.

https://fred.stlouisfed.org/data/GDPC1.txt

 

U.S. Bureau of Labor Statistics (2023, a)  Indexes of Aggregate Weekly Hours of Production and Nonsupervisory Employees, Total Private [AWHI], retrieved from FRED, Federal Reserve Bank of St. Louis; https://fred.stlouisfed.org/series/AWHI, May 12, 2023. Note that the data were accessed from the internet address below.

 

https://fred.stlouisfed.org/data/AWHI.txt

 

 

U.S. Bureau of Labor Statistics (2023, b) All Employees, Total Nonfarm [PAYEMS], retrieved from FRED, Federal Reserve Bank of St. Louis; https://fred.stlouisfed.org/series/PAYEMS, May 12, 2023.  Note that the data were accessed from the internet address below.

https://fred.stlouisfed.org/data/PAYEMS.txt

 

 

U.S. Bureau of Labor Statistics (2023, c) All Employees, Total Nonfarm [PAYNSA], retrieved from FRED, Federal Reserve Bank of St. Louis; https://fred.stlouisfed.org/series/PAYNSA, May 12, 2023. Note that the data were accessed from the internet address below.

 

https://fred.stlouisfed.org/data/PAYNSA.txt

 

U.S. Bureau of Labor Statistics (2023, d)  Indexes of Aggregate Weekly Hours of Production and Nonsupervisory Employees, Total Private [CEU0500000034], retrieved from FRED, Federal Reserve Bank of St. Louis; https://fred.stlouisfed.org/series/CEU0500000034, May 12, 2023.

 

U.S. Bureau of Labor Statistics (2023, e)  Business Employment Dynamics Summary.  Posted April 26, 2023; available online at the internet address below.

https://www.bls.gov/news.release/cewbd.nr0.htm

 

 

U.S. Bureau of Labor Statistics (2023, f)Labor Force Participation Rate [CIVPART], retrieved from FRED, Federal Reserve Bank of St. Louis; https://fred.stlouisfed.org/series/CIVPART, May 12, 2023.

 

U.S. Census Bureau (2023) Advance Retail Sales: Retail Trade and Food Services [RSAFS], retrieved from FRED, Federal Reserve Bank of St. Louis; https://fred.stlouisfed.org/series/RSAFS, May 13, 2023.

 

 

 

ADDITIONAL READING IN SOME OF MY EARLIER BLOG ENTRIES

 

https://harrisonhartman.blogspot.com/2023/05/not-listening-to-broken-records-may.html

https://harrisonhartman.blogspot.com/2023/04/do-price-retail-sales-and-job-data-show.html

https://harrisonhartman.blogspot.com/2023/03/making-case-for-pause-why-i-would.html

https://harrisonhartman.blogspot.com/2023/03/3-out-of-4-aint-good-february-us-retail.html

https://harrisonhartman.blogspot.com/2023/03/3-out-of-4-aint-good-february-us-retail.html

https://harrisonhartman.blogspot.com/2023/03/half-full-or-half-empty-brief-note-on.html

https://harrisonhartman.blogspot.com/2023/02/why-are-people-pessimistic-about.html

https://harrisonhartman.blogspot.com/2023/02/falling-employment-and-debt-deflation.html

https://harrisonhartman.blogspot.com/2023/01/the-debt-ceiling-in-united-states.html

 

 

NOT LISTENING TO ‘BROKEN RECORDS’ MAY LEAD TO BROKEN HEARTS

Would another increase in the Federal Reserve Bank’s federal funds rate, the interest rate for bank-to-bank overnight loans in the U.S., be Overkill (not to be confused with the Men At Work hit song)? At least some think that the Federal Open Market Committee (FOMC) of the Federal Reserve may have already Gone Too Far.  (I think that the last 3 words were an England Dan and John Ford Coley song title.)

I don’t mean to be redundant redundant (get it?) by sounding like the proverbial broken record, but additional economic data suggest that the U.S. economy may be rapidly losing momentum and heading for a recession, so that a pause in interest rate hikes may be appropriate in May and beyond.  (Is that redundant redundant again (with ‘may’ and ‘May’)?)   The stimulus measures helped substantially.  However, it may be that most people have spent most if not all of their stimulus funds.  They and the overall economy may need something else to provide relief and ‘get things going again.’

The observation that monetary policy has a long and variable lag in terms of its impact on aggregate demand and in turn the price level (and its percentage change, a.k.a. the rate of inflation) and also real GDP, or real output has been long established and is perhaps generally accepted.  My recent blog posts are merely a very small subset of announcements that inflation in the United States may be coming under control.

One of the drawbacks of further tightening of monetary policy now is that we may not know the impact of such a decision for possibly more than nine months, just as we may not know the impact of many if not most (or all) of the FOMC’s past interest rate increases over the last year or so.  Given that it may take a while for the impact of further rate hikes to be felt in the economy by way of possible lower inflation rates, why not try to provide relief to millions of people now?

As for evidence of the US economy slowing down, according to the U.S. Census Bureau (2023, a), seasonally adjusted (SA) retail sales and food services fell 5 out of last 7 months including March 2023. The same series but not on a seasonally adjusted (NSA) basis from the U.S. Census Bureau (2023, b) actually rose in March 2023 but probably less so than normal because the NSA level from March 2023 is less than not only December 2022 but also May 2022 and August 2022! Apparently, the increase in NSA retail sales and food services was so lackluster compared to many if not most previous months of March that when removing seasonal factors, the SA value was reported down for March 2023.

US real GDP NSA was so disappointing in the first quarter of 2023 that it is now below its level from not only 2022q4 but also 2022q3 and 2022q2. That hasn’t always happened when comparing US real GDP in the first quarter of a year with the same variable from the second quarter of the previous year (for example comparing 2020q2 with 2021q1 and comparing 2014q2 with 2015q1).  The percentage change in SA US real GDP at an annualized rate fell in both 2022q1 and 2022q2 and increased by only 1.1 per cent in 2023q1.  Thus, real GDP grew less than 1.2 per cent in three out of the last five quarters. Using the data from the U.S. Bureau of Economic Analysis (2023, a and b) available on the St. Louis Fed FRED website, I estimate that the average annualized growth rate of US real GDP (SA) was a little less than 1 per cent per year over the last five quarters. Clearly, the US economy seems to be cooling off quickly.

The recent financial crisis may not be over based on information last week and today (May 1), with Isidore and Dmitracova (2023) of CNN and others pointing out the failure of First Republic Bank. Raising the federal funds rate higher further increases banks’ borrowing costs (and at least some borrowers’ costs if banks pass on the cost increases) and could lead to more bank failures and even more of a reduction in real GDP growth, if not a recession.

Does possibly overreacting to inflation now correct for the Fed maybe keeping rates low for too long? This could be especially important to consider given that (1) month-to-month inflation may be relatively low and (2) supply factors over which the FOMC has little control may have been the most important factor in the recent run up in inflation.  Given that at least some are predicting at least one federal funds rate cut before 2024, the federal funds rate may be getting “Hi Hi Hi” as Sir Paul McCartney might say (or “Say Say Say”) after a period of surging inflation.  The Beatles might have said in “She Loves You,” “yeah yeah yeah.”

Continuing with the pop music theme, yesterday I heard Gene Cotton’s hit “Before My Heart Finds Out” on an old Casey Kasem countdown and then in the late afternoon/early evening the same day on a satellite radio station. Although I like the song, some may find that redundant if not overkill.  Back to economics, at the risk of being redundant redundant, I would like to see the FOMC keep the federal funds rate unchanged for now.  So far, with the FOMC apparently not listening to the ‘broken record’ calls for a pause in rate hikes, many may be broken hearted by job and real GDP losses that could come with a recession.  As Jimmy Ruffin might have asked if he were still alive, what will become of the broken hearted?  Will they be like “all the lonely people” in Eleanor Rigby? 

If we wind up with a recession, Stevie Wonder might say “You can feel it all over.”  And the Dave Clark Five (and others before) might note that recessions seem to keep happening “Over and Over” again.  Talk about a broken record, I may be getting redundant redundant redundant, and maybe I’ve gone too far with these puns.  But on a more serious note, with the FOMC meeting starting less than 24 hours from this initial posting during the evening of May 1, 2023 (or "Tonight Tonight Tonight" as Genesis might say), we won’t need to wait long to see what the FOMC decides to do.

 

Please note that web addresses for some of my earlier blog entries appear below the References.  Also. Please realize that data revisions may alter the above figures and analysis.  Also, I apologize for any misstatements, misunderstandings, inconvenience, or confusion.

 

 

REFERENCES

 

Isidore, Chris and Dmitracova, Olesya, CNN.  (2023)  JPMorgan Chase to Buy Most First Republic Assets after Bank Fails?  May 1, 2023, available online at:

https://www.cnn.com/2023/05/01/business/first-republic-purchase-hnk-intl/index.html

 

U.S. Bureau of Economic Analysis, Real Gross Domestic Product [ND000334Q], retrieved from FRED, Federal Reserve Bank of St. Louis; https://fred.stlouisfed.org/series/ND000334Q, April 28, 2023.

Note that the data used to compare quarterly values in the series were at the website below.

https://fred.stlouisfed.org/data/ND000334Q.txt

 

U.S. Bureau of Economic Analysis, Real Gross Domestic Product [A191RL1Q225SBEA], retrieved from FRED, Federal Reserve Bank of St. Louis; https://fred.stlouisfed.org/series/A191RL1Q225SBEA, April 30, 2023.

Note that I used data to calculate the five quarter average from the series at the website below.

https://fred.stlouisfed.org/data/A191RL1Q225SBEA.txt

 

https://www.bea.gov/news/2023/gross-domestic-product-first-quarter-2023-advance-estimate

 

U.S. Census Bureau.  (2023, a) Advance Retail Sales: Retail Trade and Food Services [RSAFS], retrieved from FRED, Federal Reserve Bank of St. Louis; https://fred.stlouisfed.org/series/RSAFS, April 28, 2023 and May 1, 2023.  Note that the file that I used to determine an increase or decrease in the series was at the website below.

https://fred.stlouisfed.org/data/RSAFS.txt

 

U.S. Census Bureau. (2023, b) Advance Retail Sales: Retail Trade and Food Services [RSAFSNA], retrieved from FRED, Federal Reserve Bank of St. Louis; https://fred.stlouisfed.org/series/RSAFSNA, April 28, 2023 and May 1, 2023.  Note that the file that I used to compare monthly values of the series was at the website below.

https://fred.stlouisfed.org/data/RSAFSNA.txt

 

 

SUGGESTED FURTHER READING FROM MY PREVIOUS BLOG ENTRIES

 

https://harrisonhartman.blogspot.com/2023/04/do-price-retail-sales-and-job-data-show.html

https://harrisonhartman.blogspot.com/2023/02/why-are-people-pessimistic-about.html

https://harrisonhartman.blogspot.com/2023/03/half-full-or-half-empty-brief-note-on.html

https://harrisonhartman.blogspot.com/2023/03/3-out-of-4-aint-good-february-us-retail.html

https://harrisonhartman.blogspot.com/2023/03/making-case-for-pause-why-i-would.html

https://harrisonhartman.blogspot.com/2023/02/falling-employment-and-debt-deflation.html

https://harrisonhartman.blogspot.com/2023/01/will-food-for-thought-feed-fed-while.html