The economic slowdown is real – risk of recession is rising. A Few Economic Notes:
- Widespread disappointment in last Friday’s employment report. Non-farm payrolls increased 142,000 in September, below the consensus of 200,000. Also, the prior two months were revised down by a total of 59,000. The unemployment rate held steady at 5.1%.
- The participation rate fell because of declines in the number of employed (-236,000, the most since October 2013) and the number of unemployed (-114,000). As a result, the employment-population ratio fell back to 59.2%, the lowest reading of the year.
- On a year-over-year basis, factory orders have declined 9.1%, the most since November 2009 (led by transportation). Durable goods ex-transportation orders were off a smaller 3.8% year-over-year.
- The diffusion index fell 2.6 percentage points to 52.9%, its lowest level since February 2010, as job growth narrowed across industries.
- Aggregate payrolls, a product of payrolls, hours worked, and earnings, fell 0.2%. This suggests slightly slower growth in personal income in the near-term, which could weigh on consumer spending growth.
- The ISM New York Current Business Conditions Index fell 6.6 points to 44.5 in September, matching its six-year low (indicating services activity in the NY region contracted). The weakness was widespread (both purchases and hiring declined).
- A fall of 3.6% below its 5-month smoothed moving average has identified 9 of the 10 U.S. economic recessions since 1950 (missing only the 1953/54 recession).
- This process can be updated monthly. At the end of September, the 5 month smoothing was at 2002.10. The S&P 500 index closed the month at 1951.36. Therefore, the S&P 500 Index closed 2.53% below. A decline of 3.6% is required to signal recession.
- The stock market is a leading economic indicator while recessions are only know in hindsight (slow collection of economic data).
- The problem we investors face is that the large equity market declines (on average more than 40%) occur during recession. Of course, this is a game of probabilities – there can be no guarantee that every signal will prove correct.
- This same analysis can be used to identify periods of economic expansion. A move of 4.8% above the 5-month smoothing provides an effective signal. – Steve Blumenthal