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"Housing went into recession, but we have the offsetting lift on the services side, so that has kept the labor market afloat."

"But we are going to continue to see weakness roll through the economy. And weather it's declared an official recession, it's almost an academic exercise at this point."

 

Real Recession?

I think we are in recession and a real one. But I also think there will not be a big jump in the unemployment rate. 

 

Expect a Long Period of Weak Growth, Whether or Not It's Labeled Recession

And I agree with Sonders that it's an academic exercise and said so months ago. 

On August 19, I commented Expect a Long Period of Weak Growth, Whether or Not It's Labeled Recession

Lost in the debate over whether recession has started, is the observation that it doesn't matter much either way.

Expect a long period of weak growth, no matter how it's labeled.

This time there will not be bailouts. Nor will the Fed quickly reverse on interest rate policy out of fear of stimulating more inflation and unwanted demand.

It does not matter whether you label this a recession or not. Besides, the NBER might not even announce the recession until it's over. That happened once already.

 

What About Jobs?

• The Covid-recession was very short, two months, not even a full quarter of declining growth. The pandemic was also accompanied by the greatest job losses in history.
• I expect the opposite of the Covid-recession: A long period of weak growth accompanied by relatively strong unemployment numbers. 

I constantly press the idea that a recession has started and I was too early thinking one would start in May or June. 

I am doing it again now.

 

Welcome to the Global Recession, It Began in December Last Year

On February 7, I said Welcome to the Global Recession, It Began in December Last Year

Let's go over the data.

 

Signs Say Industrial Production Has Peaked and so a Recession is Imminent

Recession lead times in months based on Fed data.

On January 18, 2023, I commented Signs Say Industrial Production Has Peaked and so a Recession is Imminent

Industrial production decreased 0.7 percent in December and 1.7 percent at an annual rate in the fourth quarter. 

 

Industrial Production Synopsis

• Industrial production peaked in October
• Manufacturing peaked in April with a double top in September
• Consumer durable goods peaked in April
• Manufacturing durable goods peaked in September
• Motor vehicles and parts peaked in October

Recession lead times vs industrial production tend to be very small, typically 1-2 month. 2001 and 2020 were notable exceptions.

 

Existing Home Sales Decline for the Eleventh Straight Month

Existing home sales from the National Association of Realtors via St. Louis Fed

It was nearly a clean sweep for existing home sales in 2022, down every month except January.

For details, please see Existing Home Sales Decline for the Eleventh Straight Month

 

December Was Another Retail Sales Disaster

Retail sales from commerce department, chart by Mish

 

Month-Over-Month Advances and Declines

• Food Service: -0.9 percent
• Food Stores: +0.0 percent
• Gas Stations: -4.6 Percent
• General Merchandise: -0.8 Percent
• Excluding Motor Vehicles and Gas: -0.7 Percent
• Excluding Motor Vehicles: -1.1 Percent
• Nonstore (Think Amazon): -1.1 Percent
• Motor Vehicles: -1.2 Percent
• Department Stores: -6.6 Percent

For further discussion, please see December Was Another Retail Sales Disaster, Even Worse With Negative Revisions

The BEA agreed with the advance numbers.

 

Personal Spending Hits a Solid Brick Wall in December Despite Rise in Income

Real Personal Consumption Expenditures from BEA, chart by Mish

On January 27, I noted Personal Spending Hits a Solid Brick Wall in December Despite Rise in Income

 

Brick Wall

• Consumers literally hit the brick wall then went into reverse in November and December.
• Real PCE fell 0.2 Percent in November and 0.3 percent in December.
• Real PCE Goods were negative 0.9 percent in both months.
• Real PCE Services rose 0.2 percent in November and was flat in December.

 

Data Consistent With Recession

When is the last time housing was down for a full year, industrial production down two months, and real spending down two months and the the economy was not in recession?

That said, the NBER is the official arbiter of recessions. 

I do not know what they will say, and it may very well depend on what happens in 2023 Q1.

 

Point is Moot

Regardless, the point is moot unless there is a credit event or a huge rise in the unemployment rate that forces the Fed to act.

Growth is going to be very weak for a long time. Perhaps based on falling mortgage rates housing stabilizes or even picks up a bit. 

The housing recession can end but weakness can easily persist for years. 

Meanwhile, signs suggest the consumer is weakening. What if instead of a collapse in Q1 it happens in Q2?

 

Corporate Profits

In many ways a rolling recession is worse than a full-blown recession that forces the Fed to act.

Long periods of stagnant growth with the Fed concerned about an uptick in inflation is not exactly a boon to corporate profits. 

And if people start eating out less, where is the hiring going to come from in the services sector?

Look at the advance retail sales numbers for December again.

• Food Service: -0.9 percent
• Food Stores: +0.0 percent
• Gas Stations: -4.6 Percent
• General Merchandise: -0.8 Percent
• Excluding Motor Vehicles and Gas: -0.7 Percent
• Excluding Motor Vehicles: -1.1 Percent
• Nonstore (Think Amazon): -1.1 Percent
• Motor Vehicles: -1.2 Percent
• Department Stores: -6.6 Percent

Even if you believe the strong January jobs report (I don't), why should hiring continue with those sales number. Everything but groceries was down. 

For my take on the allegedly strong jobs report, please see Unemployment Rate Hits New Low of 3.4 Percent as Jobs and Employment Jump But...

 

Looking Ahead

Retail sales may very well determine a recession start date. But the trend is ominous. So is the outlook for corporate profits as long as the Fed is hiking.

If for some reason the Fed cuts, it sure won't be because the economy is doing any good. 

 

How Many Rate Hikes Does the Market Now Expect of the Fed?

One month ago, the market thought the terminal rate was 5.00 percent in June followed by two or three 25-basis point cuts all the way to 4.32 percent.

Now it thinks the terminal rate is 5.36 percent in September with rates still at 5 percent in December. 

For discussion, please see How Many Rate Hikes Does the Market Now Expect of the Fed?

 

What's Priced In? 

The number of rate hikes is another moot debate. 

The real questions are what happens to corporate earnings and is that priced in?

I don't know, and no one else does either. But my expectation is that higher for longer is not priced in and that we are not close to a bottom in the stock market.

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