Recession Watch: here we go again
(…) The fan charts below show Fathom’s outlook on the likely course for GDP across the major advanced economies plus China. For each, a recession is in our central case: either right away (the August GDP print for the UK suggests the recession here may already have begun), or within the next year or so. In China’s case, there is a large swag of downside risk visible in this chart, which arises thanks to the pronounced risk of a banking crisis there.
The gold dots on these charts represent the mean forecast from the Reuters poll of economists. Fathom’s central forecast is below the consensus in all cases: in fact, the consensus is often above the range of our 80% confidence intervals captured in the shaded bands of these charts. (…)
China has a housing problem. In some urban areas, house price to household income ratios are now as high as 18:1. In contrast, the house price-to-income ratio across the US is around 3:1. The answer to China’s housing problem should be simple (build more houses) — and yet it is not.
Bizarrely, while there are plenty of construction projects in China, not enough of them are being completed. Indeed, Fathom estimates that the stock of housing currently under construction or paused (including those demolished) would ensure sufficient accommodation to house more than 200 million people. This is roughly equivalent to the population of Brazil.
Why not finish them and declare them vacant and ready for sale? The answer is simple — if they released these additional homes on to the market, the boost to supply would crash house prices and place significant stress upon developers, mortgage holders and banks.
Policymakers are aware of the issues in the housing market but, fearing the impact on the wider economy, have traditionally been reluctant to address them. That low key stance on the housing market appeared to change in the run-up to Xi Jinping’s expected third term as President. Regulations such as the ‘three red lines’, and Beijing’s decision to let the troubled property developer Evergrande fail, reflect this new, tougher stance.
Even so, the plan is not to burst the housing bubble (which would undermine the government’s implicit guarantee, both for that sector and the wider economy), but simply to slow the rate at which it continues to expand. Managing this successfully was always going to be a difficult juggling act.
Given the recent steep decline in new construction projects, with housing starts down 37% year-to-date, it is easy to draw comparisons between the current situation and the onset of previous housing market crashes in the US and Spain.
Where China stands apart from those previous crises is in terms of house prices, which remain broadly flat. This has partly been achieved by reducing the number of residential construction projects that reach completion (they are down more than 20% in the year to date). Whether this will be sufficient to prevent prices falling more dramatically remains to be seen.
The big question now is whether the issues in China’s housing sector will spill over into other sectors of the economy, especially banking. So far, recent debt defaults among the nation’s largest companies have remained highly concentrated in the construction sector — even more so than normal — with little suggestion that trouble may spread. But that does not mean that contagion can be ruled out. Indeed, consumer confidence and spending plans have collapsed at a remarkable rate, as elevated house prices mean households are highly exposed to adverse outcomes in the real estate sector.
So, what are the odds that these troubles will spill over into the banking sector? Banking FVI scores are elevated globally, and the picture in China is no different — the odds of a crisis are at their highest since before 2010. Indeed, given the malign international backdrop, the attempted clampdown on the housing sector looks somewhat akin to poking a bear in the eye with a pointy stick. As a result, Fathom’s latest quarterly outlook assumes a 15% likelihood of a banking crisis erupting in China. (…)
Consequently, the impact of a banking crisis in China is likely to be very large — Fathom estimates that the typical loss in output following a banking crisis reaches as much as 10% after three years. This is responsible for the very pronounced downside skew to Fathom’s fan chart for Chinese GDP.
Regarding the short-run outlook, the global economy is weakening rapidly, with the US and Europe forecast to experience recessions in the very near term and China to suffer significantly weaker growth in 2023. A global recession may be avoided, but the world will probably experience notably below-trend growth of 2.1 percent in 2023.
Beyond 2023, the global economy will likely return to its slowing trend growth rate (2.6 percent) relative to the prepandemic pace (3.3 percent). The aging workforce across many mature and large emerging market economies will have a material dampening effect on the growth of labor and capital. As these quantitative drivers of growth slow, productivity increases will become more important drivers of output and revenue growth. (The Conference Board)
- President Joe Biden played down recession risks in a CNN interview on Tuesday. He said that if it does happen, he believed it would be “very slight.”
U.S. Small Business Index Improves During September
The NFIB Small Business Optimism Index rose to 92.1 during September from 91.8 in August, according to the Small Business Economic Trends survey conducted by the National Federation of Independent Business. This was the third consecutive monthly increase and left the reading at the highest level since May. The NFIB Uncertainty Index fell to 72 in September from 74 in August.
Five of the index’s ten components rose in September. The reading of planned employment rose to 23%, its highest level in three months. Though it remained negative, the index of expected real sales in six months rose to -10% last month from -19% in August. It stood at the highest level since February of this year . The index of expected credit conditions also remained below zero at -6%, but it was the least negative reading in three months. Those reporting that now was a good time to expand improved minimally to 6%, the highest level in four months. The earnings trend measure edged higher to -31%, but remained near the expansion low.
Working lower, the percent of firms expecting the economy to improve fell to -44% and reversed a small piece of its August gain. The percent of firms with positions they were unable to fill right now weakened to 46% from 49% in August. It the lowest since June of last year. Firms expecting to make capital outlays in the next three to six months eased minimally to 24%. The reading for those reporting that inventories were too low fell to one from three, and those planning to add to inventories weakened to zero from four.
On the pricing front, the percentage of firms raising prices fell to 51% from 53%, the least percentage in twelve months and down from a 66% March high. The percentage of firms planning to raise prices eased to 31%, the fewest since January 2021 and down from a November 2021 high of 54%.
As for labor costs, the percentage of firms raising compensation during the last three months eased to 45% from 46% and stood at the lowest level since February. The percentage of firms planning to raise compensation declined to 23% in September from 26%. It remained down from highs of 32% in each month of Q4’21.
The single most important problem facing small business was inflation, reported 30% of NFIB members, up from nearly zero at the beginning of last year. The quality of labor was reported as the most important problem by 22% of respondents, down from a November 2021 high of 29%. The cost of labor was reported as the most important problem by a steady 10% of firms, up from eight percent in June.
Roughly 24 million small businesses exist in the U.S. and they create 80% of all new jobs. The typical NFIB member employs 10 people and reports gross sales of about $500,000 a year.
- Median household spending growth expectations fell sharply to 6.0% from 7.8% in August, its steepest one month decline since the series’ inception in June 2013, and its lowest reading since January of this year. The decline was broad based across demographic groups. (NY Fed’s Survey of Consumer Expectations)
Dodge Momentum Index Rises In September
The Dodge Momentum Index (DMI), issued by Dodge Construction Network, improved 5.7% (2000=100) in September to 183.2 from the revised August reading of 173.4. The DMI is a monthly measure of the initial report for nonresidential building projects in planning, shown to lead construction spending for nonresidential buildings by a full year. In September, the commercial component of the Momentum Index rose 2.9%, while the institutional component also increased, seeing a double-digit gain of 11.7%.
After a solid performance in September, the DMI landed less than 5% below an all-time high. On the commercial side, the figure was primarily bolstered by an influx of data centers entering the planning queue. The institutional component saw a notable increase in research and development laboratory projects in the education sector, with solid contributions from healthcare and recreation projects entering the planning process. On a year-over-year basis, the DMI was 26% higher than September in 2021; the commercial component was up 25%, and institutional planning was 28% higher.
A total of 39 projects with a value of $100 million or more entered planning in September. The leading commercial projects included a $500 million data center campus on the Tech Park at Brambleton site in Ashburn, VA, and the $500 million construction of two warehousing buildings at the Matrix Global Logistics Park’s West Campus in Bloomfield, NY. The leading institutional projects were the $311 million Shoshone-Bannock Casino in Mountain Home, ID, and a $300 million laboratory project at 120 Middlesex Ave in Somerville, MA.
“The gain in the Momentum Index and its components in September reassures us that despite whispers of recession, owners and developers are still looking to move forward with projects to meet demand,” stated David Reaves, senior economist for Dodge Construction Network. “Certain subsectors have shown resilience since the pandemic’s onset, such as data center projects, and continue to stream into the planning pipeline. However, looming challenges still remain for the sector, including supply shortages and the rising cost of materials that could chip away at the flow of new projects if inflation is not tempered.”
Apartment demand cratering
The rental market is chilling out after an explosive run last year, Emily writes. Soaring rent prices have been a major driver of inflation. This could be a sign that those price pressures are starting to ease — but it could take time before the consumer price index numbers reflect the shift.
Demand for new leases took a surprising tumble in the third quarter, according to data from RealPage. It’s the first time in 30 years that the firm has seen negative demand for new apartments in Q3, traditionally a strong season.
“Negative demand” means more folks moved out of apartments than moved in.
The slowdown isn’t necessarily about affordability but is more to do with how folks are feeling about the economy, according to RealPage’s analysis.
Negative demand is a sign of a slowdown in new household formation — people holding off on moving out of their current situation, in other words. (Axios)
Data: RealPage Market Analysis; Note: Negative demand means more renters moved out than moved in; Chart: Axios Visuals
Europe’s Car Output to Plummet by Millions, S&P Predicts
Parts shortages and supply bottlenecks are likely to weigh most heavily on automakers from November through spring of 2023, particularly if energy is cut during the colder winter months, S&P Global Mobility said in a report released Tuesday. (…) “Factories may have to halt “shipments of completed vehicles due to shortages of single components.” (…)
S&P had forecast that Europe-based factories would produce 4 million to 4.5 million vehicles per quarter. If energy restrictions are put in place, auto output could drop to as low as 2.8 million per quarter. That would be 4.8 million to 6.8 million units of lost production on an annual basis. (…)
Factories in Spain, Italy and Belgium face the biggest risks, with all three countries receiving the lowest score on energy self-sufficiency.
Intel Plans Thousands of Job Cuts in Face of PC Slowdown Chipmaker may announce move around time of its earnings report on Oct. 27
- Mortgage lenders continue layoffs as demand plummets. (Bloomberg)
- Amazon Workers at California Warehouse Seek to Join Upstart Union
(…) The ALU [Amazon Labor Union] in April won an election at a warehouse employing about 8,000 workers in New York City’s Staten Island — an outcome Amazon is seeking to overturn. The group lost a second vote at a much smaller Staten Island facility the next month, but has since sought to back Amazon workers beyond New York City.
An ALU-affiliated group of workers at a warehouse in Schodack, New York, near Albany, begins voting on whether to join the union on Wednesday. Vote counting at the facility, called ALB1, is set to begin Oct. 18.
The Retail, Wholesale and Department Store Union, meanwhile, is seeking to represent workers at an Amazon warehouse in Birmingham, Alabama. Federal officials determined that Amazon’s conduct during a vote there last year made a fair election impossible, and a rerun election remains too close to call.
31% of Retirees Say Continued Inflation Would Motivate Them to Rejoin the Workforce Overall, 14% of current retirees stated they are open to or actively looking for work. 41% of retirees would look for a job if they could have a flexible work schedule, and 35% would do so if they could work remote full-time.
SENTIMENT WATCH
Bridgewater’s Dalio warns of a ‘perfect storm’ for economy
(…) Domestic tension in the U.S. population caused by “irreconcilable differences” and a yawning wealth gap, combined with international conflicts, are contributing to the perfect storm, he said.
“The Fed and the government together gave enormous amounts of debt and credit and created a lurch forward. A giant lurch forward and created a bubble. Now they’re putting on the brakes. So now we’re going to create a giant lurch backward,” Dalio said at the Greenwich Economic Forum. (…)
Interest rates above 4.5% could tip the economy into a downturn, he said. “I don’t know whether that’s 4.5% or the economy could not take an interest rate much higher than that before it’s going to be negative.”
Rich Millennials Have Lost Confidence in Stock Market, BofA Says A new survey by the bank finds that the young and wealthy prefer assets like cryptocurrency, real estate and private equity.
Individuals ages 21 to 42 with at least $3 million in assets have only a quarter of their portfolio in equities, compared with more than half for those who are older, according to the study, which was released Tuesday. (…)
The Bank of America study, which surveyed 1,052 people with investable assets of more than $3 million, found that younger people allocated 15% of their portfolio to digital currencies, compared with just 2% for older respondents. (…)
Baby Boomers will transfer an estimated $84 trillion of their wealth to Generation X and millennials between now and 2045, according to market research by Cerulli Associates. The bulk of that money is projected to go to heirs, while about 15% will be donated to philanthropy. (…)
INSIDERS STILL CAUTIOUS
While investors appear to have started the fourth quarter convincing themselves that the Federal Reserve is near the end of its tightening cycle, insiders remain cautious. The INK US Market Indicator has only managed to edge up to 44% which is a few points higher than last week. At 44%, there are slightly more than four stocks with key insider buying for every ten with key insider selling. If September 30th represents a market low, insiders are not confirming it, at least not yet. (INK Research)
