I have been receiving quite a few e-mails regarding my “blown” U.S. recession call and that it may be time for me to embrace the “Goldilocks” economy where the business cycle has emerged as a relic from the past. Many folks are quoting Claudia Sahm as saying she is not at all fussed about the fact that her own labour market “rule” has already flashed the recession signal.
There were many similar e-mails from clients in 2007, and the best thing I did then was to follow my instincts and judgment and not waver or throw the towel in.
It feels very much the same to me today.
Employment is always the last man standing as the cycle turns and there is so much weakness in so many parts of the economy – housing, commercial construction, the industrial sector. All in recession.
The consumer has hung in, but there are numerous strains beneath the veneer. The myriad of deficit-busting fiscal stimulus packages these past three years provided a strong antidote to the most acute U.S. Federal Reserve tightening cycle since the Paul Volcker era in the 1980s – but even here, the incremental growth boost to gross domestic product (GDP) has shifted to neutral.
And, as was the case in 2007 as the cycle was turning, all of a sudden the data underwent significant revisions, which is why the National Bureau of Economic Research waited until December, 2008, before telling the world that the recession nobody was aware of until Lehman failed in September, 2008, had actually commenced a year before.
Most pundits fail to realize that the initial government data releases are of limited sample size and prone to huge revisions down the road. When you read what business contacts were telling the Fed district banks in the latest Beige Book, it contained the same language we saw in July, 1990, March, 2001, and December, 2007.
Half the United States is in recession right now when we apply data science to the commentary. As we saw with the Quarterly Census of Employment and Wages (QCEW), and August’s huge 818,000 downward revision to payrolls for the 12 months from April, 2023, to March, 2024, the government data are riddled with huge sampling errors. I will not be duped.
Yes, the stock market is behaving extremely well. Much of this reflects the anticipation of interest-rate cuts and the discount effect on future cash flows. But the bond market is actually telling me that our macro call is on track, and it is the bond market that tends to be much more prescient, especially at inflection points in the economic cycle.
As for Claudia Sahm – we are friends and, with the utmost of mutual respect, the reality is that 30 per cent of the increase in the unemployment rate from the lows has been due to layoffs, which is not at all unusual ahead of recessions.
So I definitely have a less “What, me worry?” attitude.
Labour hoarding is intact, but that is not really a signpost of economic well-being any more than home prices rising to record highs on the back of razor-thin inventories, as existing homeowners became prisoners in their own units this cycle after locking in their mortgages at generation-low interest rates.
The fact that hiring rates, the true measure of labour demand, are slicing lower like a hot knife through butter is a telltale sign of the cracks surfacing on the employment scene – and obviously now catching the eyes of even the most ardent hawks over at the Federal Reserve.
The job of monetary policy makers is not to fall too far behind any curve and to focus less on yesteryear and more on what lies around the bend. While many (including yours truly) fell way behind the inflation curve in 2021 (though the Fed is privy to information the rest of us don’t have at our disposal), the Fed, through its “data-dependence” strategy this past year, allowed itself to fall way behind the economic curve.
It wasn’t that evident in 2021 just how far the Fed let itself fall behind the inflation curve, but it sure did become apparent in 2022 and 2023. And the policy response came fast and furious and with that an incredible cyclical bear market in Treasury notes and bonds.
Unbeknownst to so many out there who gazed at flawed and backward-looking macro indicators, the Fed is now just as much behind the growth curve as it was behind the inflation curve more than two years ago. This by no means suggests we are going back to the zero-bound on the funds rate, barring either a severe recession or financial accident. But going back to the prepandemic level of 1.75 per cent for the Bank of Canada’s policy rate is a solid bet, and curve dynamics would therefore peg the low in the 10-year T-note at 2.25-2.50 per cent, which means that bond investors can look forward to what they have already experienced since the peak in yields in October, 2023: double-digit equity-like returns with no need to take on equity risk at nosebleed multiples.
David Rosenberg is founder of Rosenberg Research.
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