There's a weirdly unprecedented thing going on with the macroeconomic data right now. Have things gotten so bad...that it's actually good news?
Take the Conference Board's leading index of economic indicators. I've highlighted it before. It's been on a terrible streak of declines, which continued--and even worsened--in May. The index dropped 0.7% from the prior month, marking the 14th straight month of declines. That makes it the third longest losing streak since the index began in 1959, according to Bespoke, and only the fourth time the streak has lasted a year or more.
The index's year-on-year declines are now approaching the roughly 10% levels we hit in 2020 during the pandemic, and in 2001 when we headed into recession after the dotcom collapse. The Conference Board itself continues to forecast a recession "within the next 12 months," even as it revised up its second-quarter GDP estimate to positive from negative territory.
But here's the weird thing; of those three other times we've ever seen the index slide for a year or more, by the twelfth month the economy was already in recession. Here we are, in month fourteen, and still no recession. We have literally never been in a situation before where the leading indicators--things like ISM new orders, weekly manufacturing hours, jobless claims, building permits, and the yield curve--have been so bad for so long, and the economy still hadn't even entered a recession yet.
So the bulls are now pondering the possibility that the leading indicators will stop getting worse, and start to get better--thus staving off an actual bigger downturn. The "cardboard box recession," in other words, as Jeffrey Kleintop of Charles Schwab has coined it, will be all that we get. It's why people are so excited about signs of life in the housing market, which tends to lead the business cycle; new home sales bottomed last July, and home prices broadly have been on the rise since January, according to our Diana Olick.
But unfortunately, there is a precedent for things continuing to get worse before they really, truly start to get better. The 2008 downturn showed us that the leading indicators can get much worse--their year-on-year drop approached nearly 20% in that case, twice as bad as what we've experienced so far. Or we could see a "double-dip" where we start to rebound, only to unravel again as the labor market deteriorates.
For all the excitement about housing, or hope for a pickup in manufacturing, important chunks of the economy are still signaling broader trouble ahead. The Dallas Fed's banking survey just showed another big drop in June loan demand, which was already down for six months straight. Their index of nonperforming loans also jumped to a level of 14.8, from 4.5 prior.
Meanwhile, U.S. jobless claims--probably the single most important leading indicator--have been on the rise since last fall. The increases this past month in particular look a bit worrisome. And investors are reacting; as Michael Kantrowitz of Piper Sandler points out, each of the last three Thursdays that we saw claims jump or stay elevated, investors have panicked out of small-caps and into larger, "safer," mega-cap tech stocks.
So while many bullish investors are making the case for a "broadening" rally and a rotation into the smaller-cap Russell 2000 (as Nancy Prial told us yesterday), Kantrowitz says he wouldn't be a buyer until we see a true cyclical rebound. And every cyclical rebound in the past has been preceded by Fed stimulus, he asserts. By contrast, this Fed is still talking about more rate hikes.
It may be tempting to think you can ignore all the recession talk because we've already heard it for so long. Alas, we may be hearing about it for a lot longer still.
See you at 1 p.m!
Kelly