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Good morning and happy Monday! This past week, we got new housing and jobs info, as well as manufacturing data from the east coast. We’ll also take a deeper dive into the leading economic indicators, and how close to a recession we most likely are. Check out my daily economy journal that you can read and subscribe to at “Think Like A Rich Guy”):
- Housing Update
- Jobs Update
- Manufacturing Activity & Leading Indicators
Housing Update
Last week, we got updates on new construction, existing home sales, and mortgage application activity. All are important because they give us backward, current, and forward looks at the housing sector of the economy, a significant contributor to our GDP.
First, let’s look at new construction, which showed strength both in new starts as well as permit activity. We believe this is largely due to the decrease in commodity prices and a recent decline in mortgage rates back into the 6% range (which, frustratingly, has already reversed). The Home Builder Sentiment index (just a survey of how builders feel about the business right now) showed some improvement, but still far below recent and historical trends:
Traffic of potential home buyers remained flat in the last survey, though up from the bottoms of December and January.
However, we believe this slight reprieve will be only temporary, as the increase in traffic and sentiment coincided with the drop in mortgage interest rates during the same time period. That has now reversed as loan rates are trending higher again, and lending standards tighten:
We believe this uptick in housing is temporary. Part of it is seasonal activity, part of it is the drop in the prices of lumber and other building supplies, and part was misplaced optimism about interest rates declining in the near-term. In fact, the leading economic indicators show that housing faces more headwinds in the coming months as mortgage rates climb again:
Indeed, the number of mortgages issued dropped after trending slightly upward, which is a seasonal trend (though still far below previous years in the last decade):
And even those who obtain rate locks aren’t always completing the home purchase. An increasing number of home purchase deals are failing to close:
As for existing home sales, we can see that there is a more significant drag here than on new home sales at the moment. Existing sales are trending with the historical seasonal upswing (more people move during the summer), but still at the bottom of the previous 10 years of activity, with a slowing trajectory going into the year (second chart):
This is despite the fact that for the first time in more than 10 years, existing home prices have finally dropped (ever so slightly) over the previous year. We believe this downward price trend is going to continue for the next year or more.
We’ve said for a full year now that rising rates into the most expensive housing bubble in our nation’s history would mean only one thing: housing prices MUST moderate. If a family can barely afford to qualify for a 3% mortgage in January of 2022 on a $600,000 home, they’ll never qualify for one at 6.5% or 7.5% interest. In that case, the only way to get that buyer into a home is to lower its asking price, possibly substantially. That is happening now:
Despite many in the real estate industry claiming the housing market is robust and (I believe, dishonestly) trying to encourage home sellers that it’s a good time to enter the market, house prices have collapsed and they continue to follow a downward trajectory. We believe housing has much further to fall as the real effects of the recession, which is sadly a loss of jobs, failure of companies, and home foreclosures (particularly in houses owned as investments and not primary residences) ramps up later this year.
One obvious and totally predictable change in housing is the behavior of sellers: instead of taking less for their homes, people who can wait to sell, are doing so, as fewer and fewer homes are being listed going into summer (this is completely counter to the historical trend):
We believe fewer homes on the market will help to keep prices stable for the next few months, though downward price pressure will definitely resume as the recession settles into the broader economy. This will reverse and pick up speed as additional homes are dropped, often involuntarily, into the open housing market due to foreclosures, “fire sales”, and relocations.
What this means to you
We continue to observe the housing market from afar. None of our Macroeconomic investment models are invested in the housing or finance sectors at this time while we wait for these sectors to bottom out. This may not be for a year or more, but we strongly believe housing will begin to rapidly decline in the coming months. Remember that real estate is one of the most sensitive secotrs of the economy to both interest rate changes and to drops in economic output:
Jobs Update
As we mentioned above, one of the primary factors keeping prices elevated is the strong demand for workers ever since the Covid-19 pandemic. There are presently 1.6 jobs available for every job seeker, so the pressure is still on companies to compete for those workers. This causes an elevation in wages, which in turn, causes an elevation in the final prices of the products and services those companies make. This “dance” between wage pressure and price pressure is what the Federal Reserve is now trying to eliminate, and the only way to do it is to slow the economy enough to kill the need for those extra workers. That’s called a recession.
We get weekly jobs data, and while there wasn’t a major change last week from the week before, some more nuanced data gives us even better insight, so I thought we’d look at those data points today.
First, initial jobless claims continued the trend toward more newly unemployed each week and were higher than the previous two weeks:
On the surface, this doesn’t appear alarming when looking back over the last decade, as these initial claims fall well within historical trends.
Instead, the number of continuing claims is what is more concerning. The trend there is basically flat, but because employment is cyclical (more people take jobs in the summer months and then hiring slows into winter), a continuing claim number that is now trending upward when all of the last 10 years (the insanity of the 2020 Covid crisis excluded), shows it is getting harder for a laid off person to find another job.
The trajectory, however, is what we need to be concerned with. Comparing jobless claims with the previous year can give us a much clearer picture of what’s happening in the workforce. You can see that from 2011-2022, continuing claims were historically similar (and remarkably stable). Only Covid (which most of us in economics now ignore as a wild outlier that was government-mandated, not market-driven) and the Great Recession of 2008-2011 bucked this historically very stable trendline. We are now seeing an increase in continuing joblessness that, while currently still relatively low, is rapidly picking up speed:
What this means to you
The job market is finally starting to soften in a meaningful way, but we have a LONG way to go to ease off of wage pressure. This will come in two ways, which the Fed is counting on. First, the economy must be slowed down enough that the demand for workers drops substantially (we are seeing the beginnings of that trend now). Second, prices and cost of living will remain elevated long enough to force many of these former workers back into the job market. The problem is, many of the people who exited the job market after Covid were near or at retirement age already, so most won’t be coming back. The only solution, then, is to slow down the economy.
Manufacturing & Leading Indicators Update
We got really strong numbers out of New York this past week on manufacturing, which most economists believe were aberrations, so we won’t spend much time on those this week. If we see a second really strong result in them next month, we will be more interested. Remember that the most recent number isn’t more important than the collective set of numbers or the trajectory they point to. Recency bias is a real problem for many investors and economists, believing that the most recent number has more importance than the collective total of the numbers. At nVest, we always follow “trend and trajectory”, not individual data points.
The manufacturing number did NOT match the services sector in the same survey, which is much more in line with recent trends and national averages:
We also believe the manufacturing data was an aberration because the same Fed Bank now points to a strong probability of a recession in the coming months. In fact, this projection is significantly higher than what was reached for most of the recessions in the last 60 years:
The Philly Fed’s manufacturing data, in stark contrast to the New York data but in line with both the Philly, previous New York, and all of the National trends and trajectories, however, showed a huge drop in manufacturing activity, alarming in both its severity and trendline. At this point, the Philly area data may fall farther than the worst parts of the Great Recession before this current recession even gets started.
It’s interesting and informative to match up lagging data (like these PMI reports showing prior activity) with both current and even forward-looking data. Looking backward shows us where we’ve been. Current data shows us where we are. Forward data isn’t 100% accurate (though often, neither is current or lagging info), but it gives us a look at the trajectory. Forward data is also very important because much of it tends to be a self-fulfilling prophesy: what we believe is coming, we prepare for, thus often making our economic projections true.
Currently, we can see that manufacturing has slowed, because the trucks that move those goods across the nation are lighter and lighter on each trip. This lets us know that we’re shipping fewer products.
Not every economic indicator flashes “recession” at once, however, and this is why there is broad disagreement between economists over where we actually are in the economic cycle. For instance, right now, only two of six indicators is telling us a recession is here:
But again, trends and trajectory matter. Look at the light blue diamonds in each bar chart, above. This was where each economic indicator was six months ago. The dark blue diamond is where it is today. Though only two indicators are flashing “recession” right now. three others are rapidly dropping into a recessionary zone. The only one still strongly counter to it is labor, and that is a challenge for the Fed, which must crush wage pressures in order to finally crush inflation. This is why, despite lots of warnings from market participants and economists that they must slow down or even stop their rate hikes, the Fed is backed into a corner. If they relent and back off of their current pressure, wage pressure continues, which means inflation remains. If they stay the course, the economy itself will suffer greatly but inflation might finally get under control.
Now a look at forward indicators, specifically the Conference Board’s LEI (Leading Economic Indicators) report As you can see, the leading indicators came in much lower than expected month-over-month:
Looking back over a 6-month change instead of monthly, we can see this decline more clearly:
Which has largely coincided with the actual declines in manufacturing and service output in the country. Fund managers have also changed their forward-looking sentiment, which will affect their investment decisions (exactly as we do here at nVest Advisors). Though we’ve been concerned with stagflation (a period of declining output with increasing prices – kind of a “worst case scenario” for the economy) since late 2021, most fund managers came around to the same conclusion in the last several months.
As an aside: look at the percentage of money managers who thought in the early months of 2022 that an “Economic Boom” was coming (the dark blue line). If that was your advisor, flee!
You’ll start hearing more and more about recession signals in the coming months on the news, but we’ve been on this for a year and a half. Recessionary signals (the first graph) popped up in the last few months and are now substantially in line with previous recessions. However (the second graph) shows that only half of the factors considered when calling a recession have been triggered so far. The other half are close but still in positive enough territory. But remember, trend and trajectory – we’re headed into a recession we’ve long been forecasting.
What this means to you
We are absolutely convinced that a deeper and more protracted recession than many are predicting, and certainly worse than the investment markets have priced in, is imminent. That’s a bold statement but we believe one that is backed up by the lagging, current, and leading economic data and trends. It is imperative that you take steps to protect your invested capital (including your workplace 401k).
The data and news will come fast and furious in the weeks ahead, so we strongly urge you to follow my daily economic journal, if having a daily look at the changing economy is vital for your investments or business activities. You can do so by visiting Think Like A Rich Guy.
Bottom Line:
Download our brand-new E-Book “7 Hacks To Recession-Proof Your Financial Life” today.
We are at the economic tipping point. We’ve been alerting our clients for over a year and a half that inflation was going to cause significant problems and our central banks would have to take progressively stronger actions to combat it. That appears to have been a correct call.
No one knows exactly when a recession will be declared, but we firmly believe most of the larger economies of the world are right at the door of one now. Recessions can take years to recover from, which is why we believe it is vitally important to get your family and business finances ready to weather through such a storm.
We predicted the beginning of a turn in the current market rally last week, and we reiterate that sentiment now. There will always be market movement that run counter to the economic data because markets are much more short-term focused, and let’s face it: until fear takes hold, greed is the prevailing emotional state of most market participants. We do believe, however, that the recent rally has fully run its course, and there will soon be a strong shift from stocks into safer investment options such as corporate and government bonds. With interest rates this high, getting a 5% or better yield, risk-free is becoming a more and more attractive option for investors concerned about the coming economic uncertainty. Once there is consensus that either the economy is earnestly deteriorating, or the Fed announces the end of rate hikes, the move from stocks to bonds will accelerate.
Whether you are our client or not, you need to consider the broader economy (and much less so the daily market fluctuations) when making investment decisions. The economy is telling us clearly what is coming, and you need to have your investment accounts prepared before that happens.
Just this past month, I published an ebook to help you get your finances ready for the recession directly ahead. It’s yours totally free. Just click on the book image to access and download it.
Use these economic reports, and those of others working in this space, to prepare. You can not only avoid much of the pain that is coming, but you might actually profit from it, if your investments are properly positioned, and you’ve done what you can to shore up your business’ and family’s financial situation. If you need help with this, nVest Advisors has amazingly affordable personal financial planning and fiduciary investment management services to help you.
This is what we do for a living, and we’re very happy to partner with you on that endeavor.
Reach out to us for a totally free financial and portfolio checkup today if you’re concerned about where your finances sit for the coming few years, particularly if you are at or approaching retirement age. We’re delighted to offer you our thoughts. You can schedule that time with us below:
Watching This Week:
- Jobs Report
- Service Sector Update
- Commodities
