Recession Prediction on the Clock
From the San Francisco Fed:
(Note that the jobless unemployment rate is defined as the fraction of people who are unemployed—adjusted for workers who lost jobs and are on temporary layoffs—in the labor force over time.)
This Economic Letter discusses how the jobless unemployment rate can be turned into a predictor for recessions. The resulting predictions are surprisingly accurate, on par with those derived from the more commonly used Treasury yield curve.
(…) The smoothed jobless unemployment rate bottomed out and turned before every recession except in 1982. Furthermore, the estimated historical trend never turned at any other part of the business cycle. (…)
Actual and smoothed jobless unemployment rate
Source: Bureau of Labor Statistics, FRED, and author’s calculations.
Figure 2 plots the change in the smoothed jobless unemployment rate (first derivative) on the horizontal axis and the change in the change (second derivative) on the vertical axis. Recession months are depicted as red dots and expansion months as green dots.
Clockwise movements of jobless unemployment rate
Source: Bureau of Labor Statistics, FRED, and author’s calculations.
Note: First derivative measures the change in the smoothed jobless rate; second derivative measures the change in the change of the smoothed jobless rate.Charted this way, the time series shows the mostly clockwise movements around the origin where the zero lines cross. To describe the movement, I turn the chart into a “recession clock” using estimates of the historical cyclical trend. Turning points in the time series occur when the change is zero and increasing, that is, when the curve crosses 12 o’clock, moving from the second quadrant into the first quadrant, labeled in Roman numerals in the figure. Notably, recessions start a few months later, as indicated by a few expansion months (green dots) after the turning point moves into the first quadrant. (…)
Compared with the slope of the yield curve, the real-time recession probability based on the jobless unemployment rate is substantially less reliable at the 12-month horizon. The slope of the yield curve performs much better with this longer lead time.
At the six-month horizon, however, both the historical trends and real-time estimates based on the jobless unemployment rate outperform the slope of the yield curve (…).
Based on current data, recession probabilities are elevated according to the slope of the yield curve where they are 25 percentage points above the threshold for recession prediction at a 12-month horizon.
For the jobless unemployment rate, they currently stand 16 percentage points below the threshold at a 6-month horizon and are thus still relatively low. While the most recent reading of the recession clock has crossed 12 o’clock into the first quadrant, the three-month moving average still shows that it hasn’t done so on a sustained basis. This assessment could change quickly if the unemployment rate ticks up in coming months. (…)
Most forecasts of a recession in 2023 see it beginning in Q1 or Q2. The San Fran Fed’s clock suggests no recession before Q3, if any.
It so happened that yesterday we learned that
US Goods-Trade Deficit Narrows to Smallest in Nearly Two Years
The US merchandise-trade deficit narrowed in November to the smallest since December 2020 due to a plunge in imports.
The shortfall decreased 15.6% — the most since 2009 — to $83.3 billion last month, Commerce Department data showed Tuesday. The figures, which aren’t adjusted for inflation, compared with a median estimate for a gap of $96.3 billion in a Bloomberg survey of economists.
Imports retreated 7.6% to $252.2 billion, the lowest in more than a year. The value of exports declined 3.1% to $168.9 billion.
The decline in imports was broad based, led by a 13% drop in the value of consumer goods. Other inbound shipments of autos, food and beverages and industrial supplies also decreased, as did most export categories.
While imports of consumer merchandise have fallen from a record earlier this year, they remain well higher than the pre-pandemic average. (…)
The trade deficit, which widened to a record earlier this year, has been a drag on gross domestic product, largely due to a surge in imports.
The November data generate “some upside risk” to growth in the fourth quarter, according to JPMorgan Chase & Co. economist Daniel Silver.
“We still think that net exports will subtract from GDP growth in 4Q on average, but we now look for a more modest trade drag than we had previously been anticipating,” Silver said in a note. (…)
Goldman Sachs disagrees, boosting its “Q4 GDP tracking estimate by three tenths to +2.0% (qoq ar), reflecting sharply lower imports in November.”
The long awaited contraction in GDP seems to be pushed out again.
In yesterday’s Economic Perspectives, I argued that Americans’ splurge on durable goods mainly benefitted foreign manufacturers and that the U.S. inventory correction underway will thus mainly impact foreign manufacturers.
The sharp 7.6% drop in November goods imports is the first sign. The declines are broad: imports of consumer goods: -13.0%, autos: -8.9%, food: -7.6%, industrial supplies: -6.0%, and capital goods: -5.5%, all in nominal dollars.
This is happening while U.S. manufacturing production has stabilized at 3% above its pre-pandemic levels and new manufacturing orders hitting an all-time high in October.
Yesterday’s piece also notes that
U.S. manufacturing employment keeps rising and could actually grow in 2023 helping sustain related services employment (e.g. transportation, restaurants, banking). KKR says that “in 2022 U.S. companies have revealed plans to reshore nearly 350,000 jobs, compared to 110,000 in 2019.” That would boost manufacturing employment by 2.7% (+0.2% in total).
This chart illustrates how past jobs recessions are essentially due to manufacturing (red). Non-manufacturing employment (blue, 91.6% of all employment) generally only slows down without declining much on an annual basis:
If KKR is right on reshoring and employers keep hanging on to their scarce employees, this could well be a soft landing after all.
Japan’s industrial production declined -0.1% month-on-month seasonally adjusted in November (vs -3.2% in October and -0.2% market consensus), recording a third consecutive monthly drop. In sequential terms, IP growth contracted to -1.4% 3Mo3M sa (vs 5.8% in September), meaning sluggish manufacturing activities will drag the current quarter’s GDP.
Even worse news is that manufacturing output is likely to deteriorate in the first quarter of next year, given that IP is unlikely to rebound for the next few months. The sluggish exports in early December suggest a weak IP in December. China’s reopening will eventually boost Japan’s IP, but we think the positive effects will only be realized by the second quarter of 2023 or the second half of 2023.
Russia Bans Sales of Oil to Countries Imposing Price Cap The action follows moves by the Group of Seven nations barring Western companies from insuring, financing or shipping Russian crude at prices above $60 a barrel.
(…) The order says Mr. Putin can create exemptions for the sale of oil to countries following the price cap if he wants.
How the Kremlin views oil contracts—and how broadly it provides exemptions—will shape whether it creates a major disruption to global markets. Many of Russia’s crude exports are now selling at market prices well below the $60 cap, primarily to countries like India, China and Turkey that haven’t agreed to join the Western sanctions.
Some of these shipments are proceeding with the help of Western companies in line with the cap’s terms, according to people familiar with them, while others are happening with financing, shipping and insurance from outside the Western countries enforcing sanctions.
If the Kremlin decides to curb oil exports to non-Western buyers, it could reduce global supply and push up prices. If only the Western countries that crafted the price cap are targeted, the impact would be much more muted since they have already banned most Russian imports. (…)
Hungary and several other landlocked EU nations pushed for exemptions to the embargo to keep importing pipelined Russian oil. Mr. Putin may now shut off those flows. (…)
Russia has exported about 2.5 million barrels of its crude each day by sea in December so far, according to commodities-data firm Kpler. That is down 22% from the average for the first 11 months of the year.
That decline, largely reflecting reduced shipments from Russia’s eastern ports, is likely due to harsh winter weather and weak demand from China as its pandemic reopening has faltered, said Matt Smith, a Kpler oil analyst. (…)
Late last week, Russia’s mainstay Urals crude sold at $42.40 a barrel from the Baltic port of Primorsk, according to Argus Media, which tracks commodity prices. If the market price of Urals rises above $60 a barrel, the cap’s impact on markets could become more apparent.
Robert Yawger, executive director of energy futures at Mizuho in New York, said data indicate some buyers in Southeast Asia appear more reluctant now to snap up sanctioned barrels, leaving some tankers adrift in the Asia Pacific market.
“They’re looking for a home in India and China, but [those countries] have all the crude they need right now,” Mr. Yawger said. “They’re loaded up.” (…)
European countries, meanwhile, are preparing a February ban of refined petroleum products such as diesel that some analysts expect to have a greater impact on global markets. Western countries also will impose price caps on Russian petroleum products in February.
The energy conflict running in tandem with the war has contributed to “an unprecedented amount of uncertainty on the supply side and resulting volatility in oil markets,” said Paul Sheldon, a geopolitical risk analyst at S&P Global Commodity Insights.
Chip Inventories Swell as Consumers Buy Fewer Gadgets Semiconductor companies are slashing production plans to try to restore balance between supply and demand.
(…) Inventory levels, typically measured in days, are at their highest levels in more than a decade, or about 40 days above the median for the chip industry and its supply chain, according to a UBS analysis. (…)
Nvidia’s customers, the company said, are trying to burn through existing stocks before replenishing and buying the latest processors.
Inventory levels are expected to approach normal levels at the end of the company’s current quarter, which ends in January, Chief Financial Officer Colette Kress said in November.
Others put the turnaround later in the year. Micron said that it is expecting the situation to persist through the first half of its current fiscal year, which ends in September. Most customers are expected to have reduced their stocks to healthy amounts by the middle of 2023, Mr. Mehrotra said in a call with analysts. (…)
Industry executives expect chip sales to roughly double by 2030, surpassing $1 trillion globally. (…)
Laid Off Tech Workers Quickly Find New Jobs Most laid off workers in tech are finding jobs shortly after beginning their search, as employers continue to scoop up workers in a tight labor market.
About 79% of workers recently hired after a tech-company layoff or termination landed their new job within three months of starting their search, according to a ZipRecruiter survey of new hires. That was just below the 83% share of all laid-off workers who were re-employed in the same time frame.
Nearly four in 10 previously laid off tech workers found jobs less than a month after they began searching, ZipRecruiter found in the survey. (…)
Workers previously employed in other industries, including entertainment and leisure, transportation and delivery, and manufacturing, also found new jobs quickly, the ZipRecruiter data showed.
(…) tech firms making cuts are outnumbered by those that are hiring. (…) Client firms in tech also haven’t mentioned any plans to cut jobs, Mr. Sutton said. (…)
Related:
- Big tech continues trading poorly. Noteworthy is that Apple volatility has managed “beating” stuff like Google and Amazon volatility recently. After all, Apple has remained the relative king. What if this one gives in as well? (The Market Ear)
Refinitiv
Also related:
Investors shed stocks at the highest weekly rate ever in the week to Wednesday, selling a net $41.9 billion of equities, according to a report from BofA Global Research on Friday that attributed the sell-off to tax-related purposes.
U.S. value funds and passive equities also recorded record weekly net outflows, of $17.2 billion and $27.8 billion respectively, the bank said.
Investors also reduced their cash holdings by a net $59.5 billion, the biggest drop since February 2022, and sold the largest quantity of investment grade and high yield bonds in nine weeks.
Local emerging market bonds drew their first net inflow since April, while emerging market equities recorded a third week of inflows, adding a net $3.2 billion.
Bond funds recorded net outflows of $10 billion (…).
Remember that when money flows out of “funds”, these funds must sell (find buyers). Their largest holdings are often the big techs…
FYI:
- Computers vs Humans: Apparently computers got more AUM than humans… (maybe a debate to be had around semantics on this e.g. automatic rebalancing is designed by humans, even passive investing is essentially following the decisions of the humans at the index providers, and algo/quant traders are still the product of armies of PhD bearing humans). Intriguing development anyway, with most likely intriguing impact on market structure/function.
Source: @StatistaCharts (ChartStorm 19 September 2021)
Also related to the tech selloff:
Instacart, the grocery delivery startup that bankers expect will list its shares publicly next year, has cut its internal valuation to around $10 billion, according to two people familiar with the situation. The new valuation is 20% lower than the one it had in October and nearly 75% lower than the price investors paid for shares early last year, when its paper valuation was $39 billion. (…)
Chinese Demand for Travel Jumps as Beijing Opens the Floodgates
- The most commonly searched destinations included Hong Kong, Japan, Thailand and South Korea.
- Japan and India will require people arriving from China to show negative tests.
Russian foreign minister Sergey Lavrov told the state news agency Tass: “We keep warning our adversaries in the West about the dangers of their course to escalate the Ukrainian crisis. … [T]he risk that the situation could spin out of control remains high.” (AP)
FYI:
Visualizing EV Production in the U.S. by Brand
Data from the EPA’s 2022 Automotive Trends Report (for the 2021 model year).
