SocGen’s Albert Edwards sees telltale signs of an economic downturn.
In and of itself, that isn’t unusual. But it’s worth a mention Thursday for the extent to which Edwards cited a few key points I’ve been keen to highlight myself recently.
First, there’s consumer credit, and particularly revolving credit.
Earlier this week, in “Debt Don’t Fail Us Now,” I spent a considerable amount of time pondering the juxtaposition between the constructive interpretation of two consecutive large monthly increases in revolving debt and the less constructive take.
On one hand, you could argue it’s a positive development. Americans are willing to keep spending in the face of a gale-force inflation headwind. The data isn’t adjusted for inflation, so some of what you’re seeing is just the price increases themselves.
On the other hand, sharp increases in revolving credit, distorted or not, still reflect high-interest debt, which people theoretically avoid unless they’re broke. (In reality, Americans take on high interest debt even when they’re not broke, but I’ll ignore that for now.)
Edwards spoke to the debate. “Is this a sign of consumer health or rather a consumer screaming out in end-of-cycle pain as their incomes are crushed by the cost of living crisis?” he wondered, noting that if memory serves, “desperate consumers often turn to this expensive form of debt at the end of the economic cycle, just ahead of the recession.”
The figure (above) is somewhat foreboding.
Albert went on to note that if, in fact, the rise in revolving credit does reflect a stretched US consumer, it wouldn’t be surprising.
“Why shouldn’t the consumer be stressed when their spending power has been crushed and totally detached from the previous rate of trend growth?” he asked, referencing the figure (below).
Real wage growth in the US, despite running at the briskest pace in modern history, still falls well short of annual inflation. The disparity is even more glaring when you juxtapose wage growth with 12-month price increases for some energy and food categories.
Of course, the biggest unknown for the Fed currently is whether, and to what extent, rate hikes can curb hiring intentions and eliminate millions of job openings which, in an ideal scenario, can be rendered superfluous with just the right amount of policy tinkering.
Those openings can be conceptualized as “free” job losses. If they’re unfilled openings, eliminating them doesn’t entail anyone being fired. The idea, then, is to let the job openings do the heavy lifting. The more they fall, the less the unemployment rate needs to rise. Or something.
I say “or something” because this is all speculative, specious and theoretical. Match efficiency is severely impaired. That could be due to any number of factors, some of which aren’t necessarily amenable to being “fixed” in the near-term. It’s likely that the unemployment rate will have to rise if the labor market has any hope of cooling such that wage growth recedes to levels more consistent with the Fed’s inflation target.
Speaking to that dynamic in March, Bill Dudley said the Fed is destined to trigger the Sahm Rule, named for Claudia Sahm, who’s semi-famous for a variety of reasons that are beyond the scope of this article.
In short, if the three-month moving average of the unemployment rate rises by a half percentage point or more, a downturn can’t be avoided.
Unlike the yield curve, there are no modern examples of a false positive on the Sahm Rule (figure above).
Edwards cited the axiom. “The US unemployment rate has now bottomed for the last three months at 3.6%,” he wrote Thursday, before exclaiming that, “If the Sahm Rule holds, any three-month rise above 4% should be ringing very loud alarm bells that a recession is not months away — it has already arrived!”
