Even though we are still waiting to hear if the US economy officially is in recession, commonly recognized as two consecutive quarters of declining economic growth, the reality is that the data across the economy has been mixed.
There has been increasing talk of “recession” in the market now for months. There are even news stories covering the definition of a recession (I assume for political reasons). But currently, the wider market news is misleading anyway. Some companies are reporting excellent business results; consumer spending seems to have held up; and though inflation remains at record levels, unemployment data has not yet ticked up. What is happening?
Basically, its all about timing. Each of these data streams looks at different behavioral patterns. These patterns have their own timing cycles, and how they are reported adds yet another timing dimension. Individually each data set does not lead to common agreement:
- Hard or soft landing?
- Recession or just a slow down?
- Stagflation or just inflation?
If you look at the data collectively however you can see a much broader pattern. And today’s Wal-Marts news for me is the data point I was waiting for. The news from Wal-Mart suggest to me that the data will now start to align and the links some have seen will soon become obvious to everyone else.
Consumer Spending Holds Up – So Far
Look at the details. It seems that consumer savings and cash balances have not been as high for such a long time. In fact, the whole Covid thing resulted in a huge uptick in cash savings from transfer payments, and a jump in savings rate to record highs. As a result, even though inflation is raging, many people actually have cash in the bank to cover the higher costs. But guess what, that can’t last.
At some point price hikes and contracting savings balance will meet – and at that point, consumer spending will crater. Credit card balances are starting to spike. Some will be covered by recent increased savings. At some point the savings will be consumed and credit card debt will then become a dead-weight on spending. This is what Wal-Mart’s recent news comes to mind. Wal-Mart targets a large swathe of the consumer base that received the government bail-out and support money. So, if they are now changing behavior, it’s the canary that tells us that things are changing. This is the trigger.
Unemployment Has not Ticked Up – Yet
Again, the data looks healthy. After Covid the government support and bail out resulted in many firms keeping employees when otherwise they might not have. For sure, many firms shuttered but the data suggests that overall, the economy has far greater demand for labor than is available. Also recognize that transfer payments helped reduce participating rate too, so fewer people are in need of work. I have seen this factor play out personally. But I have also seen that flip recently where those, paid to stay at home, have run out of funds and are now back looking.
But there is other news of lay-offs. Every week there is another story in the news. It is therefore just a matter of time. The arguments that this recession might be nothing like the past is only useful up to a point. Unemployment growth is there, but it is being masked – so far – by increasing participation rate. We will see it in the (delayed) data soon.
Net: It Looks Worse Going Forward
If you triangulate the data streams, as I try to do here, the Wal-Mart bad news – in the midst of lots of other good business news – is just what I was looking for. It’s not that Wal-Marts’ business is bad; it’s that finally the wave of defenses for consumer spend may have been breached and Wal-Mart is as good a bell-weather as any to call it. I hope I am wrong. After all, this is just a blog, not a piece of research. If wrong, we may not experience a recession and IT spending will hold up and no one will care for my musings. if I am proved right, it will be luck based on some rough and ready economic analysis and a few assumptions. At least the credibility of my annual “assumptions” blog might increase.
Later this week we will hear if the Fed raises rates. The consensus (CNBC) this morning was yes and with 75 basis points. There is also talk today that this might be the period at which inflation peaks, and rate-rises peaks. While we might see more raises, those subsequent raises might be smaller in each reporting period. I am not so sure yet. But I would expect the raft of bad news in business reporting will start to ramp up, and market sentiment will decline. And while interest rates are raising, don’t forget that real rates are still negative! Rates of 3% and inflation of 8% means that real interest rates are running at -5%. This is the strangest monetary experiment event.
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