Editor’s Note: Lakshman Achuthan and Anirvan Banerji are co-founders of the Economic Cycle Research Institute (ECRI). The opinions expressed in this commentary are their own.
The stock market is once again nearing record highs amid investor hopes that a recession is off the table — at least for now. After all, economic data like retail sales and the jobless rate don’t look disastrous, a trade deal with China may be in the works and Federal Reserve Chairman Jerome Powell said Wednesday he expects the economy to remain strong, even as the Fed cut interest rates for the second time this year.
But more than half of CFOs in the United States expect the country to enter into a recession before the 2020 election, according to a new survey released this week. Our own research shows they’re right to be concerned: The economic slowdown is continuing apace, and the risk of a recession has edged higher.
The conventional wisdom today is that, while manufacturing has slowed due to the trade war, the consumer is in good shape because of a strong jobs market. But the hard data reveals a harsher reality.
Even though the jobless rate remains near a half-century low, year-over-year payroll jobs growth — which measures the percent increase in nonfarm jobs over the past 12 months – already peaked at a three-year high of 1.9% in January. Since then, it has plunged to an eight-year low of just below 1.4%.
The question now is whether jobs growth will worsen further. Growth in the Economic Cycle Research Institute’s U.S. Leading Employment Index (USLEI) — designed to answer that question because it predicts cyclical peaks and troughs in jobs growth — has plummeted to its worst reading since the Great Recession. Looking forward, the implication is crystal clear: job growth is poised to slow further in the coming months.
Meanwhile, year-over-year real GDP growth has also turned down from its Q2 2018 cyclical peak, when we saw the best GDP growth in recent years – a tax-cut-boosted three-and-a-quarter-year high. Over the past year — through Q2 2019 — it’s already dropped to a two-year low, and will fall to a three-year low if the Atlanta Fed “nowcast” at the time of writing — of sub-2% GDP growth for the current quarter — is correct.
In other words, the hard data show that the slowdown in US economic growth — which began over a year ago, as ECRI had predicted — is ongoing. And our research says that it won’t end anytime soon.
Here’s the danger. If economic growth and job growth keep slowing, there remains a real risk that those slowdowns will culminate into a recession. Indeed, the drop in jobs growth to an eight-year low, following the plunge in USLEI growth to a ten-year low, should undercut the conventional wisdom that the job market will stay strong. And sharply slower jobs growth won’t sustain the healthy consumer spending required for the economy to shrug off the manufacturing downturn.
But even the hard data in hand may be weaker than it looks. For example, the eight-year low in payroll jobs growth doesn’t factor in the already-announced downward revision to nonfarm jobs, the details of which won’t be released until next February. What we do know is that the current data — shown in the chart — overstates the number of jobs added between April 2018 and March 2019 by more than half a million jobs.
So today, in September 2019, real-time data shows year-over-year nonfarm jobs growth falling below 1.4%. The last time it hit a peak and then fell to that low a number — in real time — was in August 2007, just four months before the Great Recession began in December 2007. That history isn’t shown in the jobs data most people see because it has been revised.
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Many forget that in early December 2007, the employment report showed the economy had gained 94,000 payroll jobs the prior month. Real-time data didn’t begin to show any payroll job losses until the February 2008 jobs report, a couple months after the recession had begun.
The real-time GDP data was even more misleading. At the end of November 2007, on the verge of the recession, the latest release showed Q3 2007 real GDP growth to be 4.9%. After being revised in later years, that quarter’s GDP growth now stands at just 2.2%.
Taken at face value, the currently available data shows both GDP growth and payroll jobs growth to be in decisive cyclical downturns. But ECRI’s analysis — based on our forward-looking indicators — predicts that those downturns will persist into next year.
Of course, many commentators are characterizing GDP growth or job growth as “healthy” or “strong.” Even without such euphemisms, narratives built around the latest jobs or GDP data tell you nothing about where economic growth is heading.
In contrast, ECRI’s forecasts are not about whether growth is strong or weak, but about the cyclical direction of growth. Will it stay in a cyclical downturn, or enter a cyclical upturn, in the foreseeable future?
When we cut through the noise around trade deal talks and economic data, the message is clear that the economy will keep slowing and the risk of a recession is still growing.