In 4-5 months, I expect the US to be in a recession.
A thread.
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Predictions without a timeframe are useless and not actionable.
Now, it seems most analysts ‘‘expect a recession’’.
Ok, but when will it hit and how hard will it be?
The answers to these two questions are very important for asset allocation in 2023.
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First of all: shall we agree on what characterizes a recession in the first place?
While many refer to 2 consecutive quarters of negative GDP growth as the main signal for a recession, the NBER instead looks at consumer spending, the labor market and corporate earnings.
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GDP reports are delayed and often subject to big revisions.
The NBER methodology is more robust, and it allows us to assess live whether we are in a recession or not mostly looking at consumers, the labor market and earnings growth.
So: let's do that.
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Here are 4 leading macro indicators that can help assess when and how hard a recession could hit.
#1: The Global Credit Impulse
When Recession? – March/April 2023
How Bad? – Bad
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The global credit impulse (blue) leads S&P500 earnings growth (orange) by 9 months, and given its rapid decline in 2022 it’s now pointing to negative YoY EPS by March/April 2023
Rapid declines in the Global Credit Impulse have preceded YoY EPS contraction in the 10-20% area
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#2: The Conference Board Leading Indicator Index
When Recession? – April/May 2023
How Bad? – On par with 2001 at least
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This index incorporates the top 10 statistically significant forward-leading indicators for the US economy.
Over the last 50+ years, every time the YoY series of this index prints in negative territory for 2+ consecutive months a recession is guaranteed.
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#3: The Housing Market
When Recession? – May 2023
How Bad? – Pretty bad, given unemployment rate is supposed to breach 7% by early 2024
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In 2007 Edward Leamer of the University of California stated that the housing market IS the business cycle
I believe he is fundamentally right
Housing-related jobs and economic activity represent anything between 12-15% of US GDP and employment alone
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The NAHB housing index (orange, inverted) leads trends in US unemployment rate (blue) by roughly 12 months
According to the Sahm Rule, a recession starts when the 3-month moving average of the US unemployment rate rises by 50+ bps relative to its low during the previous 12m
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#4: Philly Fed New Orders
When Recession? – May 2023
How Bad? – Too early to say, probably on par with 2001 at least
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The survey goes out to 125 CEOs of relevant companies who tend to have a good grasp of where economic activity is headed.
Over the last 40 years, every time the 12m moving average of this index dropped below 15 for 2+ months, a recession always followed.
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Conclusion: several leading macro indicators are pointing to a US recession starting in 4-5 months, and of a magnitude at least on par with 2001.
Looking under the hood, the latest GDP report also confirms organic growth is rapidly trending down and heading below zero.
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How will the Fed respond?
And how to position portfolios in this uncertain macro environment?
I provide data-driven macro analysis and actionable portfolio strategy to thousands of investors, including the world's leading hedge funds.
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Originally tweeted by Alf (@MacroAlf) on January 28, 2023.
