A Rolling Recession Is Underway

The following is an excerpt from our Morning Briefing dated October 12, 2022.

Debbie and I have said it before: “The next recession may be the most anticipated recession of all times.” We have a reason to say it again: Jamie Dimon, the CEO of JPMorgan Chase yesterday said a recession is coming.

Dimon acknowledged that the US economy is “actually doing well,” but he thinks it could be in a recession within six to nine months. Among Dimon’s major concerns are inflation, interest rates, quantitative tightening, and Russia’s war in Ukraine. “These are very, very serious things which I think are likely to push the US … in[to] some kind of recession,” Dimon said. He added that Europe is already in a recession.

Those are all valid points. Here’s our assessment of the economy’s recession prospects:

(1) Rolling recession adds up to growth recession. We agree that the US economy is actually doing well even though we think it has been in a “rolling recession,” hitting different industries at different times, since the start of this year. So rather than a hard landing, we think we are already experiencing a soft landing, a.k.a. a “growth recession.”

The rolling recession is rolling through the single-family housing industry. It is rolling through the retailing industry that is scrambling to discount merchandise to clear unintended bloated inventories. It is rolling through the auto industry, which finally seems to have the parts needed to boost production; but the jump in interest rates is depressing the demand for auto loans and autos.

Dimon undoubtedly can see the weakness in both mortgage demand and auto loans. An index of mortgage applications for new purchases is down 37% y/y through the September 30 week to the lowest since October 2015 (Fig. 1). Single-family housing starts are down 23% since February through August (Fig. 2). September’s auto sales were relatively weak at 13.7 million units (saar), down 10% from January’s 15.2 million units, even though the auto industry’s supply-chain problems are abating by most accounts (Fig. 3). The weakness in auto sales is occurring for domestic autos and light trucks as well as imports (Fig. 4).

Dimon undoubtedly also sees that demand for commercial and industrial (C&I) loans is booming. Indeed, total C&I loans rose 14.6% y/y through the September 28 week (Fig. 5). The sum of C&I loans and nonfinancial commercial paper is up $290 billion ytd through the end of September (Fig. 6). This series is highly correlated (not surprisingly) with the value of business inventories, which rose to a record high partly as a result of unintended accumulation and rapidly rising prices.

(2) Our new growth recession forecast. There was no growth in real GDP during the first half of this year, confirming the notion of a growth recession. Growth was actually down slightly during Q1 and Q2. So far, Q3’s growth isn’t following anyone’s recessionary script.

The Atlanta Fed’s GDPNow tracking model’s latest estimate is that real GDP was up 2.9% (saar) during the quarter. We are raising our Q3 forecast for real GDP from 1.5% to 2.5% and lowering our Q4 one from 1.5% to 1.0%. We are lowering our 2023 GDP growth rate projection from 2.5% to 1.5% (Fig. 7). So we think that the growth recession could linger well into 2023.

(3) Consumers are still consuming. So far, consumers haven’t read the recession memo. They are spending freely, according to MasterCard SpendingPulse, which found that retail sales grew by double digits, both online and offline, in September 2022. Excluding autos, off-line retail sales increased 11% y/y, and e-commerce sales rose 10.7% y/y. (The data are based on in-store and online retail sales across all forms of payment and are not adjusted for inflation.)

Not surprisingly, MasterCard’s data show relative weakness in housing-related retail sales. Furniture & furnishings and hardware retailers had small gains of 1.4% and 1.7%, respectively.

On the other hand, “experiential” spending is strong. In September, spending at restaurants rose 10.9% y/y, and spending on airlines and lodging also experienced double-digit y/y growth of 56.4% and 38.1%. (See the October 7 CSA article titled “Mastercard: September U.S. retail sales sizzle.”)

Try our research service. See our Predicting the Markets book series on Dr. Ed's Amazon Author Page. Please see our hedge clause.