Business cycle chart book

Incoming data suggests that recession risk for 2023 continues to increase and is generally at highly elevated levels. Notably, the 10y3m yield curve finally inverted, ending October at -1bp. Historically, recessions don’t start until 6-18 months after initial inversion of 10y3m. But that signal is arriving late relative to other leading indicators and so it might push the shorter end of that range (if indeed a recession materializes).

Last week’s jobs report was mixed. There is a growing divergence between the establishment survey and the household survey in terms of the trend in total employment, with the household survey moving mostly sideways over the past seven months. The household survey shows just 150k in cumulative job gains since March, whereas the establishment survey shows 2.5 million. Also, the unemployment rate increased and that was with a decline in the labor force participation rate, a bad combination for the outlook. The lack of meaningful improvement in labor force participation continues to be a concern.

Conversely, temporary jobs are still making new all-time highs, typically a long leading indicator. In other words, recession typically only arrives several months after a peak in temporary employment. Also, cyclical job categories continue to show gains.

Bank lending standards, according to the Fed’s Senior Loan Officer Opinion Survey (SLOOS), have continued to meaningfully tighten. The New York Fed’s Household Debt and Credit Report comes out later this month and will provide further clues on the household credit cycle, which is looking like it has turned as judged by new transitions into delinquency.

One of the variables that’s different in this cycle (and difficult to gauge), is that excess household savings built up in 2020 and 2021 through fiscal stimulus look like they have only been partially drawn down (roughly 25%). The remaining buffer of excess savings could prolong the cycle.

Internationally, there are some signs that China’s economic growth is reaccelerating, with mixed implications: likely a positive for global growth but could add to inflation pressures and central bank tightening plans.

In summary, the weight of the evidence currently suggests that recession risk is very high. As always, the outlook remains data dependent and requires constant reassessment.