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DAVID ROSENBERG: A String Of Extremely Rare Events Show That Recession Risks Are Rising (SPY)
After getting off to a positive start this year, many key economic data points like manufacturing and job numbers have disappointed. And the risks of a U.S. recession are on the rise.
In today’s Breakfast With Dave report, Gluskin Sheff economist David Rosenberg says we are seeing some incredibly rare things happen. He points to 7 key signs that recession risks are rising:
- The Philly Fed index: The Philly Fed index came in at -12.9 in July and in the past three months has averaged -11.8. Rosenberg writes that an -11.8 average over three months has “coincided with the U.S. economy tipping over into recession seven of the eight times that such a negative reading has occurred over such a time frame.”
- Retail sales: Retail sales crumbled in June falling 0.5 percent, declining three months in a row. Looking back retail sales declining for three consecutive months has only happened 2 percent of the time and each time (barring one) it happened the economy was in a recession.Gary Shilling has also pointed this out, and Rosenberg says what happened in the April-June period was a one-in-50 event. “Moreover, the only time the economy was not already in a recession with a three-in-a-row sales decline was in the October – December 200 period amidst the tech wreckage – but the recession began the very next quarter.”
- Employment: Wall Street can expect big layoffs with Morgan Stanley joining Goldman Sachs in announcing job cuts for the second half of the year. More significantly however, Rosenberg says another below 100,000 reading on nonfarm payrolls for July will make it four-straight months of sub-100K reading. In the past 50 years, only once did such a weak pace of job creation fail to push the economy into a recession.
- Disinflation: While food prices could be a wild card in terms of the inflation, there has been a definite downward trend in inflation. “The flat to negative readings in the past three months has led to a mild deflationary environment where the CPI has declined at a 0.8 percent annual rate. How common is that? Not very. It last happened at the depths of the Great Recession in early 2009 and looking all the way back to 1950, is a one-in-20 event.”
- Exports:The ISM manufacturing export orders fell to 47.5 in June, the lowest level since June 2009. The service sector export order index fell to 49.5, its lowest since July 2011. Exports, which accounted for over 40 percent of the pickup in real economic activity since the recession ended, are starting to look weak.
- Food costs: Grain prices surged 40 percent in little over a month and this is going to hit household budgets. Moreover, every recession since 1970 was “preceded by a squeeze from surging food costs”. Remember, food and beverages account for 15 percent of the spending basket.
- Fiscal Cliff: The Fiscal Cliff, which refers to $ 600 billion in tax and spending provisions set to change at the end of the year, could shave between four – five percent from GDP. With economic growth running at its current pace Rosenberg writes “you do end up arithmetically with a severe recession”. The last two times (i.e. 1960 and 1969) we saw a fiscal withdrawal as intense as the one coming in 2013, recessions followed.
Rosenberg says housing is carving out a bottom, but says there are no clear signs that a “durable recovery is at hand.”