David Rosenberg of Rosenberg Research tracks 20 recession “indicators.” Two years ago, there were just two indicators pointing to a recession. Last year, the number of indicators predicting a recession rose to five. As of Friday, that number jumped to nine.
“What is the best recession indicator? That's a hard question to answer, but why not look at all of them?” Mr. Rosenberg said. Reviewing the indicators last week, he wrote: “45% of the recession indicators we track today have already triggered. Going back to 1999, we have never had an economic downturn without one.”
Five of the nine flashing reds include the Conference Board's “Current State” index, leading economic indicators, full-time employment, temporary service employment and retail sales.
The Institute for Supply Management's manufacturing index, released on Tuesday, backed up Rosenberg's assessment: It was down for the fifth straight month, signaling that manufacturing is shrinking.
The lowest level in several years
Looking more closely, new orders are at a two-year low and production indicators (factory utilisation) are at their lowest since the government shut down the economy in May 2020. Also, the price payment index shows that input-level inflation remains an issue.
The ISM Purchasing Managers' Report confirmed that the manufacturing index had declined for the fifth consecutive month.
Chris Williamson, chief business economist at S&P Global Market Intelligence, summed up the numbers this way:
The further decline in the PMI indicates that manufacturing is becoming a drag on the economy midway through the third quarter, and forward-looking indicators suggest that this drag may intensify in the coming months.
Weaker-than-expected sales have left warehouses filling with unsold stock and a lack of new orders has led factories to cut production for the first time since January. Producers are also cutting staff numbers for the first time this year and buying less raw materials amid concerns about overcapacity.
The combination of falling orders and rising inventories signals the gloomiest manufacturing trends in the past 18 months and one of the most worrying signs since the 2008 global financial crisis.
Although lower demand for raw materials has eased pressure on supply chains, rising wages and transportation costs continue to be widely reported as contributing factors to rising input costs, which are now rising at the fastest pace since April last year.
Consumers and retailers suffer
At the consumer level, things aren't looking good either. The Economic Optimism Index, compiled and published by Investor's Business Daily, has remained in negative territory for 37 months. It reflects consumers' “six-month economic outlook,” “personal financial outlook,” and “confidence in federal economic policy.”
John Tamney, editor of RealClearMarkets, writes that 86% of Americans remain concerned about inflation and 78% are worried about an economic slowdown. Nearly half believe the U.S. economy is already in recession.
The retail sector of the U.S. economy continues to struggle. In the 12 months ending in June, the number of corporate bankruptcy filings increased by more than 40% compared to 2017. Ten restaurant chains, including Rubio's, Red Lobster and Tijuana Flats, have filed for bankruptcy so far this year.
KFC announced it would close 25 stores in Illinois, Indiana and Wisconsin. Major banks including Bank of America, Chase and Wells Fargo have closed more than 40 branches in just two weeks. Big Lots, which once had nearly 1,400 stores, announced it would close 315 stores. Rite Aid announced bankruptcy and will close up to 500 stores nationwide.
Upcoming elections
If Rosenberg's “indicators of indicators” of a recession are correct, then the U.S. economy is on the brink of a recession, or is already in the midst of one. This does not bode well for Democrats in the upcoming presidential election. As Bill Clinton's chief economic advisor James Carville famously said, “the economy will decide the outcome of the election.”
