In search of turbulence in force

The business climate in June became more alarming. Almost all indicators of business confidence are down, sometimes very markedly, but none of them point to a recession. In addition, we examine a number of high frequency indicators here looking for a gap that could herald a reversal. Most of them show good resilience to the shocks in the US economy, but two are on the negative side: mortgages and weekly jobless claims. In both cases, the danger zone has not yet been reached, but we are approaching it.

Focus US Bruno Cavalier, Chief Economist and Fabien Bossy, Economist

Looking back, it is easy to find one or more causes of a recession. The difficulty lies in fixing the inflection point in real time. According to the very apt formula of Alan Greenspan, former President of the Fed, “a recession is characterized by significant data gaps.” He said this in an interview with the Financial Times in May 2008. Bear Stearns stock rebounded in March. Everything seemed to lead to a fire, but there was no spark. In four months she will come along with Lehman Brothers. In some cases, the economic situation can be restless, but without discontinuity (1987, 1994, 1998, 2016). Today, the economy is developing on an increasingly unstable basis, combining an energy shock and a monetary shock of the first magnitude. Are we seeing a gap?

The analysis of the business cycle depends on the delay in the publication of statistics. Most of them are monthly, there is necessarily a lag in relation to the real-time situation. In good weather this is not a problem, but in more uncertain situations you risk missing a turn. To solve this problem, a large battery of high-frequency data is investigated here. They have the advantage of being quickly available, but the disadvantage that they are volatile and need to be smoothed out. This is not a panacea, but better than in the fog (painting). First observation: some variables have not yet returned to pre-pandemic levels, everything related to leisure (travel, hotel occupancy). The second observation is that there is no break in the activity data. Most have improved over the past few months, which is typical of recovery. The third observation: in June, the proportion of weakening data increases. Two signals are particularly negative: an increase in jobless claims and a sharp change in the number of mortgage applications.

2022.07.04.US activity


2022.07.04. Consumer confidence
US: Consumer Confidence (UoM vs. Conference Board)

In June, a study by the Conference Board recorded a sharp deterioration in consumer confidence for the second month in a row. The decline is much larger than in the University of Michigan survey (schedule), presumably because the UoM is paying more attention to the climate of spending and inflation, while the Conference Board is paying more attention to employment conditions. Households describe the labor market as very resilient, close to all-time highs, but expect employment to deteriorate in the coming months (schedule).

If household confidence falls, what about their spending? The final national accounts estimate revised consumption growth in the first quarter of 2022 from +3.1% to +1.8% year-on-year, which in retrospect indicates that the slowdown in spending has begun since the beginning of the year. Monthly data for May show real (ie, price-adjusted) consumption falling 0.4% m/m, entirely driven by spending on goods (-1.7%). Spending on services continued to grow (+0.3%). The three-month-adjusted savings rate continues to fall to 5.3% of disposable income, below pre-pandemic levels. Excess savings accumulated over the past two years have declined moderately.

2022.07.04.US Conference Council
USA: employment conditions (present and future)

The consumer spending deflator (the Fed’s favorite index) is still less dynamic than the CPI. In May, it rose by 0.6% m/m, while the core index by only 0.3% m/m. Over the past three months, core PCE has risen +4.2% year-on-year, up from nearly 6% at the start of the year. Finally, a signal indicating disinflation.

Following PMI (-4.6 points to 52.4), other regional manufacturing confidence indices (Richmond, Dallas) fell sharply in June. “Hard” data on orders and deliveries of durable goods in any case in May were still stable (excluding defense and aviation, +0.5% and +0.8% m / m).

The real estate sector is one of the most susceptible to monetary tightening. While confidence and sales trends have begun to decline, this is not the case for home prices, no doubt it is just a matter of time. In April, they remained on the slope of more than +20% throughout the year. It is hard to imagine that this trend will continue, given the change in the number of applications for mortgage loans.

Monetary and fiscal policy

If the last FOMC meeting (June 15) had taken place two weeks later, would the Fed have made the same decision? The question arises because one of the reasons given by Jerome Powell for raising the key rate by 75 bp. instead of the initially expected 50 bp, there was a jump in household inflation expectations by 0.3 p.p. that just came out. Fifteen days later, in the final poll, the increase is only +0.1 point to 3.1%. Futures contracts now suggest a Fed rate cut in the second half of 2023.

Continued this week

employment certificate (July 8) will be scrutinized for any signs of weakening employment conditions. A harbinger of this is the slow growth of initial requirements. The pace of job creation should continue to slow, but is still expected to be above the usual pre-pandemic trend. To trace also the evolution of wages, which of late seemed to show some signs of moderation. ISM services (6th) will also be followed to judge the state of the business climate. Given the already published regional surveys, a decline seems likely.