Leading us right over a cliff
Stop reading now if you don’t like bad news. Because there’s no way to sugarcoat the terrible report we just got. And the worse news is that the Fed is either ignorant, or knows A potentially nasty recession is imminent and just doesn’t want to talk about it.
The 10 am ET release of the index of leading indicators just came in worse than expected. Yep–all the data that tells us where the economy is heading is slowing more sharply than thought. Get this: every time, since at least 1959, that the index has dropped more than 1% year-on-year, a recession has hit in the subsequent months, as Jim Reid of Deutsche Bank warns. “There are no false positives,” he wrote to clients this morning.
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How bad is it right now? The index just fell 1% month-on-month…for the third straight month! It’s now down 7.4% year-on-year, similar to the drops witnessed in the late ’70s recessions, the dotcom crash, and when Covid hit. The financial crisis was so bad the index fell more than 20%, and let’s hope we’re not headed for a repeat.
It is in fact possible that we are already in recession right now. We’ll get all the January data next month. If payrolls are negative, it’s probably a done deal. Remember, we just learned last week that both retail sales and industrial production–two key components of the business cycle–stalled out at the end of last year.
It would now appear that three of four NBER business cycle indicators have peaked for this cyclewith employment as the lone survivor,” wrote MKM Partners’ Michael Darda after the awful data last Wednesday. Both retail sales and manufacturing, he said, “appear to have hit a wall.”
Strategist Brian Reynolds echoed that sentiment this morning. Manufacturing is in even worse shape than he thought,” he wrote to clients. “Excluding autos, the sector went into recession in April.” Auto production–which was thrown out of whack because of Covid–is “masking the overall weakness in manufacturing.” This, he said, “reinforces our prior thinking…[to] sell stock market rallies until the Fed is done tightening and the debt ceiling situation is resolved.”
“There was widespread weakness in leading indicators in December,” the Conference Board noted in its release this morning, “indicating deteriorating conditions for labor markets, manufacturing, housing construction, and financial markets in the months ahead.” Oh goody!
It would be a lot more reasoning if Fed officials talked about this reality. they could say, “we don’t think leading indicators are that useful anymore because of Covid dynamics.” they could say, “We know we’re going into recession, but we have to in order to slow the labor market.” they could say, “we’re worried that even a deep recession won’t keep inflation from roaring back.” Anything of the sort! But nope. We’re still slicing and dicing three-month annualized trailing core versus “super-core” PCE.
If you, Fed officials, refuse to acknowledge the deeply inverted yield curves, that’s one thing. If you are going to ignore the complete collapse in genuine leading economic indicators (building permits, manufacturing orders, consumer expectations, and so on), that’s quite another.
Larry Summers in Davos warned that central bankers not finishing the job on inflation would be the “greatest tragedy” for the global economy right now. I’m not so sure. The greatest tragedy would be sending us into a needlessly severe recession that could have been ameliorated if policymakers were more attuned to economic signals.