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The Conference Board released its LEI today.
I won’t go into the deets, other than to say it’s not bueno and they are still calling for “a contraction of economic activity starting in Q2 leading to a mild recession by mid 2023”.
You can view it here.
www.conference-board.org/topics/us-leading-indicators
I won’t go into the deets, other than to say it’s not bueno and they are still calling for “a contraction of economic activity starting in Q2 leading to a mild recession by mid 2023”.
You can view it here.
www.conference-board.org/topics/us-leading-indicators
A lot of smart folks rely on some combination of indicators to make business cycle calls.
I am sympathetic to this approach, as I myself do the same. Its ok!
I am sympathetic to this approach, as I myself do the same. Its ok!
But I think it’s important to conduct broad contextual analysis outside of an indicator-based framework.
The reason is what gives indicator based analysis it’s strength - historical data - is also its weakness.
The reason is what gives indicator based analysis it’s strength - historical data - is also its weakness.
Human instinct often anchors to the past for guidance. This is called hindsight bias.
When we hear refrains like "human behavior never changes" or "history doesn't repeat but it does rhyme", hindsight bias gets reinforced.
When we hear refrains like "human behavior never changes" or "history doesn't repeat but it does rhyme", hindsight bias gets reinforced.
Indicator-based business cycle analysis is basically a glorified form of hindsight bias.
Yet we try to comfort ourselves with data analysis, cycle averages for this or that, time horizons, regressions, filters, and on and on.
In other words, it's noisy.
Yet we try to comfort ourselves with data analysis, cycle averages for this or that, time horizons, regressions, filters, and on and on.
In other words, it's noisy.
Yes, there are some commonalities to every business cycle, but there also a tremendous amount of variation and data dispersion in every business cycle.
This is because no two business cycles are the same.
This is because no two business cycles are the same.
And once we allow ourselves to the see beyond the similarities (which we all know about bc we went to the same schools, use the same models, and use the same data), and look at the differences in real time, then we can extract some signal.
"It's different this time" should not be a 4-letter word.
It should be a core part of your research process.
Only then will you break your hindsight bias and find a new signal.
It should be a core part of your research process.
Only then will you break your hindsight bias and find a new signal.
This business cycle is an amazing case study in this dynamic.
By all intents and purposes, we should be in a recession yesterday:
By all intents and purposes, we should be in a recession yesterday:
-Worst inflation in 40 years.
-Most aggressive hiking cycle in 40 years.
-Bear market in housing.
This combo alone should have tanked the economy. Yet here we are.
Well what's different this time? Why are we not in recession?
-Most aggressive hiking cycle in 40 years.
-Bear market in housing.
This combo alone should have tanked the economy. Yet here we are.
Well what's different this time? Why are we not in recession?
Lots of things are different, but three big things stand out to me that were big enough to move the dial on the macro scale to make a meaningful difference:
1. The gargantuan fiscal policy response.
Over the course of 2020 and 2021, Congress passed three separate massive fiscal support packages totaling $5.8 trillion in 2020 and 2021 – about 28% of U.S. GDP.
These were levels of fiscal activism not seen since WWII.
Over the course of 2020 and 2021, Congress passed three separate massive fiscal support packages totaling $5.8 trillion in 2020 and 2021 – about 28% of U.S. GDP.
These were levels of fiscal activism not seen since WWII.
2. The supply chain induced backlogs in housing construction that kept people employed.
Fixed residential investment got hit hard in 2022, but the sector did not shed jobs, and unit construction growth barely budged.
Fixed residential investment got hit hard in 2022, but the sector did not shed jobs, and unit construction growth barely budged.
3. A structural housing shortage that created a positive feedback loop in #2 above.
These three things came together in a perfect storm to snuff out an economy wide recession and employment downturn.
These three things came together in a perfect storm to snuff out an economy wide recession and employment downturn.
Yes there are current sectoral recessionary pockets.
But these three things I mentioned have until now effectively provided the economy with a bridge of time while it finds a new post-covid equilibrium.
But these three things I mentioned have until now effectively provided the economy with a bridge of time while it finds a new post-covid equilibrium.
I think the bridge has some more runway. According to the SF Fed, there is still about one-half trillion dollars in excess savings in consumers pockets.
www.frbsf.org/economic-research/publications/economic-letter/2023/may/rise-and-fall-of-pandemic-exces...
www.frbsf.org/economic-research/publications/economic-letter/2023/may/rise-and-fall-of-pandemic-exces...
That's about 2% of GDP waiting to enter the economy in the form of purchases.
It's what we grow in a year.
This is on top of the nominal income being produced in a year with record unemployment.
It's what we grow in a year.
This is on top of the nominal income being produced in a year with record unemployment.
Contextualizing these massive macro flows leads to a richer, deeper understanding of what is going on in the real economy outside of an indicator-based framework.
And once you have that, you can make more informed judgements about everything from interest rates, asset prices, and asset allocation.
I am not myopic. A recession will come. But I think the cycle differences I mentioned will distort timeframes and sequencing.
We are seeing this now. The aging recession calls will require more extreme outcomes in order to make their case.
We are seeing this now. The aging recession calls will require more extreme outcomes in order to make their case.
A Conference Board recession call for Q2/mid 2023 requires an employment extinction event of 1.6 million jobs over the next 4 months.
Possible if an economic meteor hits.
Unlikely.
/FIN
Possible if an economic meteor hits.
Unlikely.
/FIN
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Cullen Roche @cullenroche
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May 18, 2023
Great thread. Thanks for posting.