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Executive Summary

The National Bureau of Economic Research, the arbiter for dating recessions, has not yet declared one – although many economists are predicting one in 2023. Many datapoints are either declining or are reaching points where previous recessions have started. Look at the graphs below including: personal consumption, Institute for Supply Management – Purchasing Managers Index, industrial production and advance retail sales. Industrial production, retail sales, personal income and employment are considered the Big Four indicators for declaring a recession (5th graph). The declining data is also being reinforced with large declines in corporate profits (see chart). Additionally, existing home sales are down significantly, money supply is falling, and the yield curve is inverted (see last graph). So, while not officially called, note the environment is ripe for recession.

Please continue to The Details for more of my analysis.

“Any contrarian knows that just as a grim present is usually precursor to a better future, a rosy present may be precursor to a bleaker tomorrow.”
–Seth Klarman

The Details

The consensus opinion among economists seems to lean towards a recession beginning in 2023. Of course, there are some who believe a recession has already begun; however, it has not been officially declared by the NBER (National Bureau of Economic Research) the arbiter for dating recessions. In this missive, I will provide a number of charts and graphs illustrating the status and current trends in the various economic datapoints. Consumption accounts for approximately 70% of economic growth. The chart below shows that personal consumption expenditures (blue bars) and durable goods consumption (red bars), on a monthly seasonally adjusted annual rate of change basis, are declining.

The ISM (Institute for Supply Management) Services Composite Index, as shown below, has dropped below 50. Any number below 50 indicates contraction and typically signals a recession.

The ISM Manufacturing PMI (Purchasing Managers Index) has been declining over the past year, and also resides below 50. The current level is consistent with readings seen during recessions.

Two important factors considered by the NBER when determining the existence of a recession include industrial production and retail sales. The graph below shows that, on a monthly seasonally adjusted annual rate of change, both indicators are declining.

Industrial production and retail sales, together with personal income and employment, make up what some economists claim to be the Big Four top economic indicators for declaring a recession. The graph below from Advisor Perspectives shows the Average of the Percent Off High of the Four Big Indicators. The current average is below the “average at Recession Starts.”

With the rise in home mortgage interest rates, existing homes sales have plummeted to levels consistent with those experienced during both the pandemic and the Financial Crisis. Overall, housing constitutes between 15-18% of GDP.

Current estimates of GDP growth for the first quarter 2023 range from 0.7% from the Atlanta Fed’s GDPNow model to -2.4% from Hedgeye Risk Management.

Consistent with weakening economic indicators, corporations are seeing a dramatic drop in profits. As shown in the chart below, excerpted from the website [calculations mine], with 37% of companies reporting fourth quarter numbers, GAAP net earnings are down 20% from the same quarter in 2021.

Another historically reliable indicator for recessions is an inversion of the yield curve. This means that the interest rate on the longer-term 10-year Treasury Note is lower than that on the 2-Year Note. The yield curve has not been this inverted since the late 1970’s and early 1980’s.

And finally, the money supply (represented by M2) which was inflated by low interest rates and massive Federal deficits, is now contracting. A small portion of this is due to Quantitative Tightening. Also contributing to the reduction in the money supply are rising interest rates, slowing housing activity and an overall slowdown in economic activity.

The drastic drop in economic indicators across the board, combined with a contracting money supply and an inverted yield curve provide sufficient evidence of a recession, either presently or in the near future. In order for the NBER to identify significant tops and bottoms in economic activity, they must wait sometimes six months to a year to see the subsequent data. So, officially it could be some time before a recession is declared. However, I believe most businesses are providing the proof through falling earnings, that a recession could already be here.

The S&P 500 Index closed at 4,071, up 2.5% for the week. The yield on the 10-year Treasury Note rose to 3.52%. Oil prices decreased to $80 per barrel, and the national average price of gasoline according to AAA rose to $3.51 per gallon.


© 2021. This material was prepared by Bob Cremerius, CPA/PFS, of Prudent Financial, and does not necessarily represent the views of other presenting parties, nor their affiliates. This information should not be construed as investment, tax or legal advice. Past performance is not indicative of future performance. An index is unmanaged and one cannot invest directly in an index. Actual results, performance or achievements may differ materially from those expressed or implied. All information is believed to be from reliable sources; however we make no representation as to its completeness or accuracy.

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