On to Greener Pastures: Smallest LEI Decline Since 2022
While the Leading Economic Index continues to signal recession, a milder pace of contraction and broad-based improvements in the index’s components suggest activity, especially in interest-rate sensitive sectors, has found a floor.
Source: The Conference Board and Wells Fargo Economics
The Leading Economic Index (LEI) continues to signal recession. Falling 0.1% in December, the LEI has slid for 22 consecutive months and currently stands only three points higher than its low point during the initial pandemic lockdown in 2020.
While the index remains in the red, the monthly outturn clocked in well below the 0.7% decline averaged over the previous three months and marked the smallest decrease since March 2022 when activity was wavering amid the start of the Federal Reserve’s tightening cycle. The milder pace of contraction suggests that activity, especially in interest-rate sensitive sectors, has found a floor.
Six components positively contributed to the LEI in December—the most since early 2022. Stock prices distantly led the pack, adding 0.20 percentage points to the headline index, as the S&P 500 was in the midst of a run toward another record high that it set last week. Initial claims for unemployment insurance (+0.09) and home building permits (+0.06) were modestly additive as well.
Notably, the Leading Credit Index, which consists of financial tightness indicators, such as the 2-year swap spread and debit balances on margin accounts, was revised to show a positive contribution in November (+0.05) and December (+0.10) for the first time since the summer of 2022. Expectations for the Fed to ease policy this year have helped to relax financial conditions.
On the flip side, sentiment remains weak. The new order component of the ISM manufacturing index chopped 0.18 percentage points off the LEI in December, nearly canceling out the gain from stock prices. Consumer expectations (-0.12) also sliced the monthly change. Yet the recent strength seen in the University of Michigan’s Consumer Sentiment index and the Conference Board’s Consumer Confidence index suggest household confidence is turning a corner as real income has strengthened amid improving inflation.
In short, while recession risks remain elevated, incremental improvements in the LEI’s components suggest the likelihood of an economic downturn is fading.
These 2 charts from Advisor Perspectives illustrate the current unusual no-landing:
Between 1959 and 2020, the LEI provided an average lead time to a recession of 10.6 months (range of 1 to 20!). The last peak was 24 months ago.
Meanwhile, the Coincident Economic Index shows no inclination towards any landing, hard or soft.
Since 1959, a declining LEI/CEI ratio led recessions by 6.8 months on average with a nice tight range of 2-9. It has now been declining for 21 months!
More useful/useless stats?
- Historically, a recession has started 23 months after the first increase of a persistent hiking cycle. In fact, only three of the last 12 persistent hiking cycles (since the late 1950s) saw a recession begin by this point [August 2023]. Given how far behind the curve the Fed was coming into this hiking cycle with nearly double-digit inflation and federal-funds rate starting at 0%, it is understandable that recession headwinds need more time to coalesce. (Franklin Templeton)
- The longest it took to enter recession after the first rate hike was 84 months.
- Not every Fed hiking cycle leads to a recession, but all hiking cycles that invert the curve have led to recessions within 1 to 3 years (Deutsche Bank).
- “Remember, it takes an average of 26 months between the time the Fed first hikes rates in a cycle and the onset of a recession. That means that it would be perfectly normal for the recession nobody sees happening to commence in the second quarter. The bull market is really impatient and tempestuous. As for the yield curve, the maximum odds of recession occur between 5 and 19 months after the inversion starts, so again, we must respect the fact that there are long lags at play.
Delayed does not mean derailed. As things currently stand, the latest Beige Book showed half the country in or about to enter recession while the other half is hanging in; likewise, the move in the unemployment rate from the cycle lows also confirms that half the country is in recession — and the other half is not. (…) we also had 21 straight months of decline in the LEI from April 2007 to December 2008. Before that, June 1973 to February 1975. Don’t throw the recession towel in just yet — delayed does not mean derailed.(David Rosenberg)
That said:
The LEADING Indicators are bottoming. The OECD’s tends to…um…lead the Conference Board’s and it appears to be doing so again in this #cycle. Remember the #Fed is a lagging indicator. (@RBAdvisors)
Desperate Chinese Property Developers Resort to Bizarre Marketing Tactics The country’s real-estate slump is getting worse—and looks set to drag on for years.
Sales of newly built homes in China fell 6% last year, returning to a level not seen since 2016, according to China’s statistics bureau. Secondhand home prices in its four wealthiest cities—Beijing, Shanghai, Guangzhou and Shenzhen—declined by between 11% and 14% in December from the year before, according to the broker Centaline Property.
Developers are starting fewer projects. Homeowners are paying back their mortgages early and borrowing less. Once-thriving property companies are stuck in protracted negotiations with foreign investors, following defaults on about $125 billion of overseas bonds between 2020 and late 2023, according to figures from S&P Global Ratings. (…)
Earlier this month, Sheng Songcheng, former head of the statistics department at the People’s Bank of China, told a local conference that the housing downturn would last another two years. He thinks new-home sales will fall more than 5% in both 2024 and 2025. (…)
Liu Yuan, head of property research at Centaline, said that without the government’s help, new-home prices will need to drop by another 50% from current levels before they reach a bottom. This is based on the assumption that the tipping point will only come when it is cheaper to buy than to rent houses, Liu said. (…)
More than 50 developers—mostly privately owned—have defaulted on their debt. Developers still have millions of unfinished homes that were sold but not delivered. Chinese authorities have set aside billions of dollars to help builders complete apartments but the logjam is growing.
The crisis has drained the coffers of some Chinese local governments, which previously relied on land sales as a main source of income. Economists estimate they have hidden debt worth anything from $400 billion to more than $800 billion. To quiet talk of potential defaults, the central government has set up debt-swap programs to help some of them refinance. (…)
Chinese authorities are considering a package of measures to stabilize the slumping stock market, according to people familiar with the matter, after earlier attempts to restore investor confidence fell short and prompted Premier Li Qiang to call for “forceful” steps.
Policymakers are seeking to mobilize about 2 trillion yuan ($278 billion), mainly from the offshore accounts of Chinese state-owned enterprises, as part of a stabilization fund to buy shares onshore through the Hong Kong exchange link, said the people, asking not to be identified discussing a private matter. They have also earmarked at least 300 billion yuan of local funds to invest in onshore shares through China Securities Finance Corp. or Central Huijin Investment Ltd., the people said.
The deliberations underscore the elevated sense of urgency among Chinese authorities to stem a selloff that sent the benchmark CSI 300 Index to a five-year low this week.
Calming the nation’s retail investors, many of whom have been bruised by the protracted property downturn, is also seen as key to maintaining social stability. (…)
In all, more than $6 trillion has been wiped out from the market value of Chinese and Hong Kong stocks since a peak reached in 2021, underscoring the challenge that Beijing faces as it seeks to arrest a decline in investor confidence. (…)
During the 2015 rout, Beijing tapped China Securities Finance Corp. as its main stabilization vehicle by allowing it to access as much as 3 trillion yuan of borrowed funds from sources including the central bank and commercial lenders. The money was used to buy stocks directly and provide liquidity to brokerages. Even so, the turbulence didn’t end until a year later. (…)
The stock meltdown is adding pressure on so-called snowball derivatives, which are structured products that promise bond-like coupons as long as the underlying assets trade within a certain range. The CSI Smallcap 500 Index, a pricing reference for some of these products, slipped 4.7% on Monday, taking it below an earlier estimated threshold that may trigger widespread losses on the snowballs.
Chinese stocks’ brutal start to the year is being at least partly blamed on the impact of a relatively new financial derivative known as a snowball. The products are tied to indexes, and a key feature is that when the gauges fall below built-in levels, brokerages will sell their related futures positions.
Stock declines are most pronounced in indexes to which snowballs are known to be linked, possibly revealing their impact. There’s also great uncertainty over just how many snowballs have been sold, which adds to their potential menace. (…)
There isn’t any single level that analysts agree as a major trigger for knock-ins. CICC in October estimated the levels where most investors would lose coupons would be 4,865 points on the CSI 500 Index, and 4,997 for the CSI 1000. Both of these have been breached this month, though the latter only on an intraday basis.
(…) the market has been on edge over any possible contagion effect. (…)
No doubt, the Party is worried the people may be getting more than angsty having seen their life long savings (housing, equities) tumble, with no end in sight, and a largely unemployed youth. That could also snowball.
From today’s John Authers’ column:
Thanks to its sheer size, and to the legacy of previous crude but effective attempts to dampen the birth rate, China’s demography tends to dominate perception. As this chart from Ernan Cui of Gavekal Dragonomics demonstrates, Chinese births are falling much faster than recent projections had predicted. Continuing declines in the number of women of child-bearing age will likely bring them down further:
Other countries have seen sharp falls in births in the past, notably Japan, where births started to decline in 1973. The country began to lapse into its long economic malaise in 2000 as that cohort began to reach parenting age. But as Cui shows, the decline in China since its recent peak in 2016 has been much faster:
- Meanwhile, India has become the world’s fourth-largest stock market, overtaking Hong Kong, where some of China’s most influential and innovative firms are listed, as global capital pours out of Chinese equities on stalling growth and regulatory uncertainty. (Bloomberg)
INTO RARIFIED AIR!
@RBAdvisors
Humanoid robots will join BMW’s production line
Figure, a humanoid robot made by an eponymous California company, can walk and manipulate things with dexterous hands. Photo courtesy of Figure
BMW’s newest autoworker is 5’6,” 130 pounds, walks on two legs, uses five-fingered hands to assemble machines — and takes a break every five hours to stroll to a charging station and plug itself in.
Under a first-of-its-kind deal, humanoid robots from a California company called Figure will begin working in BMW manufacturing plants, starting in Spartanburg, South Carolina.
Robots have long been essential tools on auto assembly lines, but this is the first time that autonomous human-shaped robots will join the fray — with big potential labor market implications.
- Humanoid robots are already being tested in warehouses, and are eventually expected to help out in hospitals and nursing homes.
- “I think the next 24 months you’ll start seeing humanoid robots in the real world,” Brett Adcock, Figure’s CEO and driving force, tells Axios.
While it’s a bit nebulous what the robots will be doing for the automaker, the agreement between Figure and BMW calls for the “deployment of humanoid robots in an automotive manufacturing environment” using a “milestone-based approach.”
- In the first phase, Figure will “identify initial use cases to apply the Figure robots in automotive production.”
- Next, the robots will “begin staged deployment at BMW’s manufacturing facility” in Spartanburg.
- BMW and Figure will also “explore advanced technology topics such as artificial intelligence, robot control, manufacturing virtualization and robot integration.”
Adcock, a serial entrepreneur, tells Axios that his robots “can do basically everything a human can.”
- “There’s just a lot of work in these facilities that’s really hard to automate,” he added. “Being mobile on the floors, being dexterous — there’s a lot of work we can do.”
- “We need humanoid [robots] in the real world, doing real work — that’s a big milestone for the whole space,” Adcock said.
- Car production is evolving rapidly, and robots have “the potential to make productivity more efficient” and “enable our team to focus on the transformation ahead of us,” Robert Engelhorn, president and CEO of BMW Manufacturing, said in a statement.
Figure robots stand at attention at the Figure factory. Photo courtesy of Figure
Automakers have been looking to lean more heavily on robots to combat rising labor costs, the Wall Street Journal reports.
- The UAW won historic labor agreements with the Big Three automakers last fall, which will translate to raises and more generous pay packages for workers.
- When asked how Ford plans to cover the cost of its new labor contract, CFO John Lawler “pointed to ‘opportunities in automation,'” per the Journal.
- Robots can do dangerous tasks or operate in hard-to-reach places — but there can be trade-offs in terms of performance and wise judgment.
Humanoid robots that can walk and use their hands are formidably hard to build — hence the small number of companies thriving in this space.
- Agility Robotics makes a robot called Digit that’s being tested by Amazon toting containers in a warehouse. (Agility is poised to open a robot-making factory called RoboFab.)
- A company called Apptronik has a new robot named Apollo that’s starting to do warehouse work. It’s also working with NASA on humanoid robot commercialization.
- Other players include Tesla’s Optimus (which recently folded a shirt, prompting jeers from observers who were underwhelmed) and Boston Dynamics’ Atlas, which does parkour.
