The last time we looked at the State Closing Index, all 50 states were in economic expansion over the past 3 months. Diffusion index = 100.
That is no longer the case today.
The May 3-4 FOMC meeting raised rates by 50 basis points, which was followed by a 75 basis point increase at the June 14-15 FOMC meeting. There was some bite as rates moved to the 1.50%-1.75% range, and we see the impact of these higher credit costs impacting the economy with inflation.
Over the past three months, 48 states have seen increases in indices (below 50), while two states have declined for a 3-month Diffusion Index of 92. Perhaps more troubling, over the past month, indicators have increased in only 44 states, decreased in 5 states, (1 unchanged).
“For the entire United States. The Philadelphia Fed’s US index rose 0.9 percent over the past three months and 0.3 percent in June. Therefore, we are still expanding, but more slowly. If the trend continues, we will eventually fall into recession.
Whether we are technically in a recession is less important than 1) Q2 earnings; 2) Q3 economic activity 3) Q3 income; 4) What the FOMC will do in response; 5) How much of this is already reflected in the stock price.
Regardless, for those of you who care about the question “Are we in a recession now?Consider 6 factors using the NBER:
1. Real personal income (less transfers);
2. Non-farm paid employment
3. Household survey employment
4. Industrial production
5. Original Wholesale + Retail
6. Actual consumer spending
Michael Gapen and his economics team at Bank America Merrill Lynch looked at these 6 factors, observing:
“We do not think the National Bureau of Economic Research (NBER) will conclude that the economy was in recession at any point in 1H’22. Exhibit 1 [chart] shows that all six-monthly indicators that the NBER uses to make its recession calls have expanded since last December. Although we are not yet in a recession, economic momentum has clearly slowed. The GDP report showed final private domestic demand — consumer spending and fixed investment — was flat in 2Q after growing 3.0% in 1Q.
Here are these 6 reasons in chart form:
All of these 6 items are currently expanding, but at a slower pace than before. Real personal income and real wholesale + retail sales are where the recession is most visible.
For those of you playing parlor games at home”Are we in a recession or not?” I agree with the BAML team’s assessment. The technical academic answer is that we are not in a recession, but we are clearly slowing down economically. This is what the Federal Reserve has been aiming for.
The odds of avoiding a recession continue to fall with each rate hike.
State Accident Index (Federal Reserve Bank of Philadelphia, July 27, 2022)
in the past:
GDP = -0.9% (July 28, 2022)
Soft Landing RIP (July 25, 2022)
Why Recessions Matter to Investors (July 11, 2022)
Are we in a recession? (No) (June 1, 2022)
1. Methodology: The Federal Reserve Bank of Philadelphia produces a monthly coincidence index for each of the 50 states. The indexes are released days after the Bureau of Labor Statistics (BLS) releases employment data for states. The Bank issues a release each month describing recent trends in state indices, with special coverage of three states in the Third District: Pennsylvania, New Jersey and Delaware. Coincidence indicators combine four state-level indicators to summarize current economic conditions in a single figure. The four state-level variables in each coincidence index are nonfarm wage employment, average hours worked in production by manufacturing workers, unemployment rate, and the wage and salary distribution deflated by the consumer price index (US city average). Each state’s index trend is set to its gross domestic product (GDP) trend, so long-term increases in the state’s index correspond to long-term increases in its GDP.
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