Recession Indicators - 3 Types

Recession Indicators - Big Burst In Motor Vehicle Sales

Before getting into Recession Indicators, let's review motor vehicle sales. There was a big burst in motor vehicle sales in May. This will help the Q2 GDP report significantly if it doesn’t get revised lower. It increases the likelihood we will see 2% GDP growth. 

Auto sales have been in a general downtrend as you can see from the chart below. There have been a few reports that have bucked the trend such as the March 2019 report. Given the slowdown in the overall economy, you wouldn’t expect to see a burst in activity in one of the weakest industries.

Specifically, total vehicle sales were 17.3 million which beat estimates for 16.9 million. Sales were above the high end of the estimate range which was 17 million. This was up from 16.3 million in April. That reading was revised lower from 16.4 million. Domestic sales increased from 12.7 million in April to 13.4 million in May. 

This improvement in auto sales will help the retail sales report. Consumer and business vehicle purchases aren’t broken down in this report. The May retail sales report will come out on Friday, June 14th. It’s coming off a very weak reading in April. Let’s see if it bounces back without any effect from the Easter calendar shift.

RedBook Sales Growth Improves & Factory Orders Fall

Recession Indicators - Redbook same store sales growth reading is now onto June which means it has no relation to next week’s retail sales report. Once again same-store sales growth was solid as growth improved from 5.7% to 5.8% in the week of June 1st. The rate has been above 5% for the past month; sales are up 1.4% compared to April. 

Redbook is implying May retail sales growth will be stronger than it was in April. That being said, Redbook’s reading wasn’t exactly weak in April. The seasonal adjustment really hurt April retail sales.

April factory orders report showed monthly growth was -0.8% which is exactly what was expected. March reading was revised from 1.9% growth to just 1.3% growth. Non-durable goods orders were up 0.5% and durable goods orders were down 2.1%. The non-durable goods reading was the new data in this report; growth was driven by petroleum and coal orders. Weakness in durable goods was unrevised from the durable goods orders report that came out on Friday, May 24th.

On a monthly basis, core capital goods orders were down 1% and shipments were flat. There was a general weakness in orders for primary metals, fabrications, machinery, and new vehicles. That’s obviously in direct contrast with the strong May vehicle sales report. 

The decline in civilian aircraft new orders and shipments were limited which might mean the decline related to 737s didn’t affect the report yet. The chart below shows the yearly growth in new non-durable goods orders improved.

Recession Indicators

Recession Indicators - The graphic below lays out the 3 types of recession indicators. 

Let’s look at the top box first. As you can see, ISM new orders coincide with the S&P 500’s yearly growth in real-time as the stock market’s performance is in line with the leading economic indicators. When the leading economic indicators are increasing on both a monthly and yearly basis, the S&P 500’s annualized gain is 11.8%. 

When they are increasing on a yearly basis, but falling on a monthly basis, the return is only 0.8% annualized. The box shows the list of leading indicators. Interestingly, even though the May manufacturing PMI was weak, the new orders component was up 1 point.

Now let’s look at the middle box. As you can see, the stock market leads the coincident indicators by 6-12 months. The stock market advanced 6 months is highly correlated with the advanced reading of real GDP. That means Q2 GDP growth will be weak to match the stock market’s drop in late 2018. 

That seems accurate since growth is expected to be 1.7%. It also means GDP growth will rebound in the back half of 2019 to match stock’s market run in the first 4 months of the year. However, I have my doubts the economy will improve in Q3 without a trade deal.

The ECRI leading index’s growth rate briefly went positive this spring, but it’s now negative again. 

Recovery in Q4 2019 and Q1 2020 will be limited. 

Recession Indicators - As you can see, industrial production and payrolls also lag the stock market. However, stocks were up to while industrial production growth was weak in April. Let’s see if that report was a blip. Jobless claims indicate the BLS labor report will be fine in May. That would be consistent with the rally in stocks early this year.

Finally, we have the lagging indicators. The S&P 500 advanced 15 months is highly correlated with C&I loan growth. This makes sense when looking at the previous slowdown because the economy started recovering in late 2016, and C&I loan growth troughed in November 2017. 

However, in April 2019 loan growth fell from 10% to 7.6% even though the economy was strong in 2018.

Weak MBA Applications

Recession Indicators - In the week of May 31st, the MBA mortgage applications purchase index showed weak yearly growth which is a reversal of the recent trend. The composite index had a weekly growth of 1.5% after it fell 3.3%. Refinance index had a 6% weekly increase after it fell 6%. 

Purchase applications index shown in the chart below, declined 2% weekly after falling 1% weekly. Yearly growth was only 0.5%. That’s only one week of subpar growth, so I’m not ready to change my view on housing just yet. Housing is still seeing a pickup in demand as price growth has slowed and interest rates have cratered.

Recession Indicators - Conclusion

This article included a strong vehicle sales report, strong non-durable factory orders, weak durable factory orders, and an abrupt decline in yearly home purchase applications growth. I’m still mildly optimistic on the housing market. The labor market is strong and affordability is increasing. 

It will be interesting to see if the March new home sales report is revised again because it was a new cycle high. The housing market leads the economy by the farthest. That new high signals a recession is unlikely this year and next year. 

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Don Kaufman: Trade small and Live to trade another day at Theotrade.