There has been a lot of talk in the financial media about an economic slowdown, with a sense—explicit in some cases—that a recession is a real possibility. Some of that talk, I will admit, has come from me. Given some of the recent bad reports, particularly the jobs report, I do feel that there is a possibility that the trend has changed. After giving it a lot of thought, though, I do not think this is what’s actually happening.
I have covered the bad news recently. Job growth is down, per yesterday’s update, consumer confidence is mixed, and retail sales have not accelerated. These are all very real concerns, especially jobs. Recent drops in manufacturing activity certainly have not helped, and turbulence around the world, especially in China and Europe, has rattled everyone.
But what does the bigger picture show?
The bigger picture looks rational
Regarding employment, of course employers pulled back. With all of the bad news in the past couple of months, they would have been nuts not to slow hiring. Ditto on consumer and investor confidence. Given the news, all of these reactions were rational. The question now is whether they are likely to have long-term significance.
The comparison I make is to the past two winters. We had unusually bad winter weather, which hit the economic statistics, which led to widespread angst. When conditions improved, however, so did the numbers. A “snowdown” (as we called it) is not a slowdown. Similarly, the news storms that have ripped through the markets over the past couple of months have depressed sentiment and the stats. Is this then a snowdown or a slowdown?
October snowdown vs. slowdown
Let’s start with employment. We’ve had two bad months, but that might have been due to decreased employer confidence. What do other numbers show?
- Layoffs are still at very low levels—employers are keeping the employees they have, even if they are not adding as many new ones.
- Job openings remain at all-time highs—employers are still hiring, apparently.
- Hiring intentions (per the ISM surveys) have increased—employers expect to hire in the future.
Maybe that jobs number is better than it looks. And, in fact, it may well be. For the past five years, per Barron’s, the initial September jobs figure was revised up—by an average of 40,000—which would make the current number look a lot better. Note also that, for the past five years, a strong second quarter has been followed by a weak third quarter—an apparent statistical quirk that we have seen elsewhere in the data.
So, yes, the numbers may turn out to be better than we think. Even if they don’t, though, if we look at the last emerging markets crisis (this isn’t it) in 1998, we also see occasional months of weak job growth, which certainly did not signal an imminent recession.
Let’s not panic just yet.
Let’s also look at what people are actually doing. If the job market were seriously weakening, the market for cars and houses would be hit as well. These are purchases that require substantial down payments and long payment schedules, so you have to be pretty confident to make them. We see car sales at all-time highs, and housing sales also are rising at substantial rates. Consumers—who are also workers—are voting with their wallets for continued growth.
Overall, while the possibility for a continued decline certainly exists, the evidence for it simply is not there yet. Given the bigger picture of both recent revisions and history, as well as what people are actually doing, it looks like once again we are seeing a short-term snowdown (although using that term in October seems problematic) rather than a slowdown or, much worse, a recession. We will certainly get one at some point, but chances are it will be delayed a bit. That’s okay. I can wait.