One thing you can count on in our monthly analysis is straight talk. We are neither optimists nor pessimists; alarmist or sugar-coater. We simply read the economic tea leaves and glean insights about what’s ahead. There is no bias or agenda here except to make accurate, actionable plans based on data and historical trends.
If you’ve been reading along, you may recall the indicators we’ve been watching all year. In the wake of incredible global upheaval that no one could have predicted a few years ago, tectonic shifts in the economy have been in play. By keeping a close eye on them, we have consistently positioned ourselves ahead of major changes.
The big question on everyone’s mind is whether or not there will be a recession. And, if so, how long will it last and how steep will it be? Warning signs are starting to flash in some of our indicators. Let’s take a closer look.
Unemployment: Everyone who wants a job right now can probably find one! The unemployment rate has ticked up a tiny bit to 3.7%, but this remains historically low. The tricky part is that this is a lagging indicator. There has been a recent wave of layoffs in the tech sector. It sounds like the job market is still hopping and everyone who got a pink slip will probably get scooped up elsewhere in no time, yet this all may have an impact on that unemployment rate. Looks good here so far, but hold that thought as we review additional data.
Corporate Earnings: Of the 94% S&P 500 companies that have reported Q3 earnings, 69% reported a positive EPS (earnings per share) surprise, and 71% reported a positive revenue surprise. It is truly an encouraging sign to see so many companies overcome today’s many challenges, like high-interest rates, supply chain issues, and tight labor market conditions, to deliver results that exceed expectations. Note, however, that about 10% of companies reported negative guidance for Q4.
Probability of a US Recession: If you want to know the probability of an upcoming recession, a good place to start might literally be the Probability of a US Recession indicator developed by the Federal Reserve Bank of New York (see chart).
This indicator uses the treasury term spread – or the difference between the 10-year and 3-month treasury rates. Aside from a few false positives, the model has been shockingly accurate over time. Since the 1960’s, yield curve inversions have consistently occurred prior to periods of economic recessions, and you can see now that the slope of the yield curve is sharply upward with no sign of abating. On its way up, yes, but still short of previous peaks that led to recessions.
Now, remember that unemployment data we put a pin in? The low rate we have today suggests strong economic growth, but look at the chart below and note how quickly the unemployment rate can change from trough to peak.
Data going back to 1954 shows that a trough in the unemployment rate also tends to be a reliable predictor of a recession. The unemployment rate will typically reach a trough shortly before an economic downturn and, once the recession begins, unemployment rises sharply.
We would be remiss not to mention the wild card factor of Black Friday and the holiday season. We’re still waiting on reliable retail sales data from Thanksgiving weekend, but it seems like consumers were eager to head back to the malls after two years of pandemic disruptions. What impact high gas prices and grocery bills that reduce disposable income will have on retailers’ bottom lines remains to be seen.
All in all, it looks like a strong economy may soon give way to a recession.
