Okay, we are going to keep this week’s Ethos a bit lighter. Simply because the rise in market volatility had us writing lots of content outside our regular weekly instalment. We received tons of feedback from our Carrymageddon special report on Tuesday following the turmoil on holiday Monday. If you missed it, click HERE, as we did our best to explain the mechanical unwinding of the yen “carry trade” and how it reverberated differently across parts of the market. Beneath the carry trade talk, there has been an uptick in folks talking about recession once again. That will be our brief topic this week.
There is no denying the economic data has turned a bit softer. This isn’t new news either; in fact, after a really strong Q1 and part of Q2, the data began rolling over. This happened first in the U.S. and now, more recently, globally. The chart below is the Citigroup Economic Surprise index, measuring the data compared to consensus, adjusted for the importance of the data release. Sorry, Canada is not on here, but the chart is similar: strong for much of 2024 and then turning negative. This was fuelled by our weak labour report on August 9.
Economic data is noisy, and since there are so many data releases, you can always find something good and something bad if you look hard enough. The key is what is more important for the market today. And that answer is simple: US consumer or labour (labor, as they say).
The U.S. consumer has been downshifting their spending patterns, which is often a sign of stress or retrenchment. We started highlighting rising credit card late payments and sit-down restaurant same-store sales many months ago (see chart below on the left). And the anecdotal pieces kept coming. This was supposed to be a record travel summer for airlines as capacity remains constrained (it seems a major plane maker is running behind) and prices are high. Well, the seats were not selling, and many guided lower and started discounting. Walmart highlighted increased spending among wealthier patrons. When the wealthy are back at Walmart, that is not a good sign. The list goes on.
Softening consumers is not a huge deal; they have been very resilient for many quarters. One positive side of the more fragile U.S. consumer has been their job market. When jobs are plentiful and easy to find, people are more confident and spend more freely. But that appears to be starting to change. Lots of people are still finding jobs, but it is not as easy as it was a few months or quarters ago. Job openings are dropping, and people are quitting as well. If you are worried about finding a new job, it tends to result in people quitting less often.
As a result, hard labour reports are now much more important than a few months ago. The official nonfarm payrolls will be more closely scrutinized, the only risk here is if the jobs have started to disappear, we may already be in a recession. Labour is a lagged indicator usually. The downtick in jobs in July was concerning, as was the divergence between the household and nonfarm surveys. There is often divergence at turning point. But for something a bit more timely, people are starting to focus on initial jobless claims. So, in the last couple of weeks, the nonfarm report was weak, but the initial jobless claims were stable. See, it is easy to find data that can support or refute any view.
Final Thoughts
The economy is slowing. But it is probably way too early to talk about a recession or even get too excited. Financial conditions have actually been easing for the past number of quarters, deficit spending is still really strong, and there are parts of the economy doing well. We will probably see a few oscillations – some better, some worse – for the economic data before recession risk becomes material. The only real certainty is that economic talk will be on the rise.
— Craig Basinger is the Chief Market Strategist at Purpose Investments
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Sources: Charts are sourced to Bloomberg L. P.
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