An old joke in the statistics world says that if you torture the data long enough, it will say whatever you want it to. But sometimes torture is superfluous. Let’s take the art and science of deciding how to interpret the US business cycle right now. Is the risk of recession high, low or somewhere in between? Yes, yes and yes.
You can find any story you want right now in US economic numbers. It is rare to find so many varieties of indicators that as a whole actually say everything at once. Let’s start on the bright side with .
US manufacturing rose again in the final quarter of 2022. Although the 2.9% increase in GDP was somewhat slower than in the third quarter, the increase exceeded expectations and gave optimists a new set of talking points. As an ABC News headline pointed out,
“The US economy grew in late 2022, defying recession fears.”
But some analysts still see trouble looming. “The growth mix was disappointing and monthly data suggest the economy lost momentum as the fourth quarter progressed,” advised Andrew Hunter, senior US economist for Capital Economics. “We still expect the lagged effect of the increase to push the economy into a mild recession in the first half of this year.”
Luke Tilley, chief economist at Wilmington Trust, also sees headwinds ahead, but believes a “soft landing” scenario is likely. “If we continue to have strong job growth and if we continue to have consumer spending on services and businesses do not reduce their [dépenses d’investissement]I think it adds fuel to the soft landing story.”
On the positive side, yesterday’s weekly stock market update suggests that the labor market will continue to grow. New claims for unemployment benefits fell to a seasonally adjusted 186,000 last week, near a record high. This leading indicator for the labor market actually predicts that there will continue to be solid progress in the short term.
But the optimistic profile of the usual indicators on the employment front is difficult to reconcile with an alternative measure based on the aggregation of unemployment figures per state. Wells Fargo economists note that “rising state unemployment signals recession risk.”
The tally of unemployment figures for the 50 US states shows a recent sharp increase. “Historically, the likelihood of a national recession increases when unemployment has risen in at least 34 states. The report adds:
“Specifically, in the first month of the last six recessions, an average of 34 states experienced such an increase. We note that this threshold is an average, and that higher or lower numbers were recorded at the start of each recession. But when the number of states exceeds the threshold of 34, one can interpret that the probability of a recession increases.
This threshold was crossed in November 2022, suggesting that short-term recession risks are currently high. The situation worsened in December, when the number fell from 35 to 39. It should be noted that not all border crossings coincided with a recession…
Although the threshold was crossed last November, we do not believe that the US is currently in a recession. That said, the deterioration in the state’s labor market conditions in the last two months of 2022 is consistent with our current macroeconomic forecast of a mild recession beginning in the second half of 2023.”
Earlier this week, another report that uses one as a measure of GDP indicated that the US economy continued to contract in January. “The US economy started 2023 on a disappointingly weak note, with business activity falling sharply again in January,” said Chris Williamson, chief economist at S&P Global Market Intelligence.
US PMI Composite Output Index
The Conference Board’s Leading Economic Index (LEI) paints an equally negative profile. “The US LEI index fell sharply again in December, which continues to signal a recession in the US economy in the near term,” said the consultancy’s senior director of finance.
Two proprietary economic indicators, highlighted in weekly updates to the US economic report, also point to a modest slowdown in the US economy.
Economic momentum index vs. Economic trend index
However, there are many indicator-based counterpoints, including the Sahm Rule Recession Indicator, which uses the unemployment rate to assess the skewness of the business cycle. Currently, this target reflects a near-zero risk of contraction from December.
The Sahm Rule Recession Indicator
How to reconcile the very different profiles of US economic activity? Maybe we can’t, or at least not yet. But perhaps we are in the presence of a new type of recession that allows very conflicting indicators to coincide in real time for a while.
Other possibilities include the simple explanation that both sides are wrong and that future data revisions will erase the discrepancy. Another scenario could be that the net effect of negative and positive business cycle indicators reflects a stagnant economy in general.
Once the full boatload of January numbers are released, the mystery may finally be solved. Meanwhile, see what you want in the US economic outlook. As Yogi Berra once noted, “Much can be observed by looking,” but it is not very useful at the moment for seeking clarity for business cycle analysis.