The Asset Guidance Group Monday Outlook for the Week Ahead Starting August 8, 2022

NBER 6 Variables Determining Recession Since Dec'21
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220805.YieldCurve10 2Spread
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U.S. Economic News:

The number of Americans filing for first-time unemployment benefits rose slightly last week, signaling a softening in the labor market.  The Labor Department reported initial jobless claims increased by 6,000 to 260,000 in the seven days ended July 30.  The reading matched economists’ expectations.  New filings had fallen to as low as 166,000 in late March — the second-fewest on record — before moving higher over the past several months as the economy slowed.  Many companies are still reporting difficulty finding enough qualified workers to fill open positions.  Meanwhile, the number of people already collecting benefits increased by 48,000 to 1.42 million.  While still remaining near a 50-year low, that reading is at its highest level since April.  Money market economist Thomas Simons of Jefferies LLC noted the overall demand for labor remains strong.  “The relative stability of continuing claims suggests that workers who are let go are still having a relatively easy time finding a new job,” he wrote in a note to clients.

In a red-hot report of the U.S. labor market, the economy added over half a million jobs in July and the unemployment rate fell back to pre-pandemic levels, according to the Bureau of Labor Statistics.  The increase in hiring not only blew past the Wall Street median estimate of 258,000 new jobs—it was actually a 6 sigma beat to expectations.  Hiring was broad-based as businesses created the most new jobs in five months.  The number of people working finally returned to February 2020 levels–the last month before the pandemic.  The unemployment rate ticked down to 3.5% from 3.6%, matching the lowest level since the late 1960’s.  Seema Shah, chief global strategist at Principal Global Investors stated, “All the jobs lost during the pandemic have now been regained.”  However, that doesn’t necessarily translate into good news for the stock market.  The strong jobs report gives the Federal Reserve the green light to continue its rate-hike trajectory.  One concern in the report, more people continued to drop out of the labor force.  The labor force participation rate fell again to a seven-month low of 62.1%–the lowest level since the end of 2021.

The number of job openings dropped below 11 million for the first time since last fall, signaling the red-hot labor market may finally be cooling off as the economy slows.  The Labor Department reported job openings slipped from 11.3 million in May to 10.7 million in June—its third consecutive month of declines.  The last time job openings were below 11 million was November of last year.  Job openings fell the most in retail (-343,000), wholesaling (-82,000) and state and local government (-62,000).  Most other industries saw little change.  Also in the report, the “quits rate”, fell only slightly to 4.23 million.  The number of people quitting their jobs topped 4 million a year ago for the first time ever, part of a pandemic-era trend known as the “Great Resignation”.  Before the pandemic, the number of people quitting their jobs averaged fewer than 3 million per month.  Layoffs remained near their historically low levels.  Stephen Stanley, chief economist at Amherst Pierpont Securities noted, “If the economy is rolling over, the labor market had apparently not gotten the memo yet as of the end of June.”

Factory activity grew at its slowest pace in two years, an ominous sign of weakness in the U.S. economy, a closely followed survey showed.  The Institute for Supply Management (ISM) reported its Purchasing Managers’ Index (PMI) for manufacturing companies ticked down to 52.8 in July from 53.0 the month before.  Economists had expected a reading of 52.1.  While readings above 50 signify growth, the latest reading was the weakest since June of 2020.  In addition, the index declined for a third consecutive month.  On a positive note, the report stated there was some relief on the inflation front.  Most of that was due to the recent decline in energy prices.  Of most concern, the ‘new orders’ index slid 1.2 points to 48—its lowest level since May 2020.

Companies in the vast ‘services’ side of the U.S. economy continued to grow in July, according to the latest data from the Institute for Supply Management (ISM).  ISM’s Purchasing Managers’ Index for services companies, such as restaurants and hotels, rose 1.4 points to a three-month high of 56.7 last month.  The reading suggests the economy continues to expand despite growing headwinds.  Orders and production rose, hiring improved, and inflation pressures eased somewhat, the report noted.  The reading was a surprise to the upside—economists had expected the index to drop to 54.  In the details of the report, the new orders index rose 4.3 points to 59.9—a four-month high.  The report supports the Fed’s view that a “soft-landing” for the economy may indeed be possible.  Lead U.S. economist at Oxford Economics Oren Klatchkin wrote in a note, “The recovery’s best days are clearly in the rear-view mirror, but this doesn’t mean an economic downtrun has begun.”

The popular definition of an economic recession has traditionally been “two consecutive quarters of negative real gross domestic product (GDP) growth”, but economists at Bank of America’s Global Research team aren’t expecting an official ‘recession’ call anytime soon.  They note that the National Bureau of Economic Research (NBER), which is the official arbiter of recessions, doesn’t use that “popular definition”.  Instead, the NBER recession committee broadly defines a recession as a “significant decline in economic activity spreading across the economy, lasting more than a few months.”  So, if it’s not strictly GDP, what other measurements does the NBER committee look at?  BofA’s team shared six of the main variables the NBER uses in making its determination.  And a casual glance explains why they’re not expecting the NBER to declare a recession anytime soon – all six measures are up since the start of the year!  (Chart from BofA Global Research via Yahoo Finance). [1]

The Week Ahead

Expectations for another 75bps rate hike in September jumped to a 70%
probability after Friday’s jobs report, but the Fed will have another monthly labor
report plus two additional inflation readings to consider between now and then.
The first of those CPI releases comes this week on Wednesday, and last month’s
weakness in commodity prices suggests that headline inflation may have
peaked. July’s producer prices follow on Thursday and are also expected to
come down given the declines in recent prices paid data. Fed speakers have yet
to pivot, so inflation remains the singular focus. Quarterly production figures,
Treasury auctions, and consumer sentiment fill out the U.S. calendar. Overseas,
preliminary Q2 GDP for the UK will be released on Friday in the aftermath of the
BOE’s gloomy forecast and the pound’s steady downtrend. In Asia, China
announces inflation numbers late Tuesday amid concerns of the property crisis
spilling over into the highly leveraged banking sector.  [2]

Chart of the Week: Inverted Yield Curve

The 2yr–10yr Treasury yield curve is once again inverted and more extremely than last month or in 2019 at -40bps. Inversions, in this case where the 2yr yield exceeds the 10yr, are relatively rare, and it’s been 22 years since these levels have been reached. A yield curve inversion has preceeded every U.S. recession since 1956, albeit ranging in time from 7 to 24 months prior. Given the conflicting GDP and employment data, it’s sure to be a passionately debated topic for months to come. Expect to hear plenty of “it’s different this time.”

Click on the Chart to Enlarge. [3]

Sources: [1] Asset Guidance Group analysis,; All index- and returns-data from Yahoo Finance; news from Reuters, Barron’s, Wall St. Journal,,,,,,,, Eurostat,0020Statistics Canada, Yahoo! Finance,,,, BBC,,,, FactSet [2]; [3]

Past performance is no guarantee of future results. Inherent in any investment is the potential for loss.

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