U. S. recession? The numbers say no, but market disagrees
Troubles in China, elsewhere aren’t bothering American consumers,
The S& P 500 is down 10 per cent from the May 21 peak, so it is officially in correction mode, and posted its worst quarter in four years in the just- ended calendar Q3 ( down 6.9 per cent). But the action beneath the surface is far worse, as 225 S& P 500 stocks are down at least 20 per cent from their 52- week highs, placing them in bear market terrain.
Remember that from the March 2009 bottom, the S& P 500 has risen at a 17 per cent average annual rate, whereas the market at this stage of the cycle that sees U. S. Federal Reserve accommodation and economic expansion — a sweet spot that has lasted six years this time around — typically rises at a pace of 11 per cent.
There is always the risk of an overshoot, but some serious value is opening for many of the domestic sectors unaffected by the strong U. S. dollar and problems in China and emerging markets.
I keep hearing that the equity and credit markets are pricing in a recession, yet the data suggest that this is hardly going to happen. I have great respect for market signals, don’t get me wrong, but they are hardly without their own spotty historical record.
Maybe the technical position is negative and liquidity is an issue, but the domestic U. S. economic fundamentals are actually improving, so sentiment is way too bearish.
Yes, the factory diffusion indexes are behaving poorly, and we saw more evidence of that Thursday with the soft reading on the ISM manufacturing index, but surveys are surveys and hard data are hard data.
How about data that cover nearly 80 per cent of the economy, like personal income and consumer spending?
Personal income rose 0.3 per cent in August on a month-over-month basis and is up at a 4.9 per cent annual rate over the past three months. The maligned wage and salary component, the income that people tend to spend, rose 0.5 per cent month over month and is up five per cent on the nose over the past three months. That is solid.
After- tax disposable income also rose 0.4 per cent month over month and the three- month pace is running at a five- per- cent annualized rate as well; in real terms, disposable earnings are up at a 3.7 per cent annual rate. That is more than just decent.
As for spending, let’s again look at what has happened between May and August — a period of negative foreign news and a slippery stock market.
Real consumer spending managed to rise at a 3.3 per cent annual rate. Durable goods, which is the deep cyclical component, has surged at a 5.9 per cent pace. Nondurables are up 5.1 per cent and services, which consist mostly of essentials, have risen 2.3 per cent. These are all in volume terms.
Discretionary consumer spending has expanded at a 3.8 per cent annualized pace from May to August, while non- discretionary spending ( essentially staples such as health care, rent and groceries) has risen at a lesser 2.1 per cent annual rate.
The ratio of discretionary to non- discretionary spending is flirting with near record highs and belies the notion that the American consumer is supposed to roll over and play dead just because of escalating problems in China and the other emerging markets.
The U. S. consumer is growing above any measure of the long- run norm, not underperforming as some believe. The deflation that the U. S. economy is importing from the rest of the world is actually now a boon to real spending here at home.
The annual increase in the personal consumer expenditure deflator is flat and that price stability, call it everyday low pricing, has ushered in a period where nominal and real consumer spending have converged at an annual rate of more than three per cent.
Back in the late 1990s, we had a similar positive exogenous shock from computer and web- based technology that was perpetuated at the time by an Asian crisis and strong dollar that compressed import costs.
We are reliving this scenario to some extent, but the exogenous shock this time has come from the fracking wave and energy technology that have producers sharply lowering oil prices, not due to a negative demand shock but rather a positive supply shock.
This, in turn, has propelled real spending growth in excess of a 3.0 per cent annual rate — some measures approach 3.5 per cent — and households are still putting about a nickel of the after- tax dollar earned into the cookie jar for a rainy day.
The U. S. consumer represents more than 70 per cent of U. S. GDP and 17 per cent of world GDP, and is still larger than the entire Chinese economy.
The stock market has indeed predicted seven of the past 20 recessions, but this time will very likely make it seven out of 21.
David Rosenberg is chief economist and strategist at Gluskin Sheff + Associates Inc. and author of the daily economic report, Breakfast with Dave. Follow David and his colleagues on twitter. com/ Gluskin-SheffInc