Albert Edwards Sees Another Recession Canary

It won’t surprise you to learn that SocGen’s Albert Edwards is skeptical this week.

Skeptical about a lot of things (and quite possibly about everything), but particularly about the notion that the US economy is “booming” and, of course, of the notion that it’s a good time to pile into equities.

If you know anything about Albert, you know he goes to Jamaica for two weeks early each year, and 2023 was apparently no exception. “Having landed back in the UK last Friday after my usual two-week January sojourn, I was welcomed by blockbuster January payroll data,” he wrote, of the much discussed US jobs scorcher.

Edwards eschewed the temptation to deride the headline payrolls print as abject farce. He did use the word “farce” on Thursday, but he also expressed “some sympathy with government statisticians” considering that unadjusted payrolls plunge three million every, single year in January which “gives statisticians a tricky job to do.”

It’s worth noting that Albert harbored a pretty optimistic outlook for the jobs market due to the simple fact that firms will be loath to fire workers they had to bend over backwards to hire, especially when finding new ones (should you need them) will likely be expensive and difficult.

“Companies are more reluctant to shed workers after having made Herculean efforts to find and hire them,” he wrote. The good news is, that points to resilient spending, as consumers are more likely to have jobs even if the economy takes a turn for the worse. The bad news, Albert said, is that it’ll probably “make the Fed more likely to overdo the rate hiking cycle,” while labor hoarding also leaves corporates vulnerable to margin compression, which could in turn lead to lower business investment. (That may already be happening, by the way.)

Edwards focused Thursday on the latest Senior Loan Officer Opinion Survey, and particularly on lending standards for small firms. Suffice to say you can make a recession case.

The color accompanying the January vintage of the survey was unequivocal. “Over the fourth quarter, significant net shares of banks reported having tightened standards on C&I loans to firms of all sizes,” the Fed said. “Banks that reported having tightened standards… cited a less favorable or more uncertain economic outlook, a reduced tolerance for risk and the worsening of industry-specific problems as important reasons for doing so.”

Editorializing around “yet more severe tightening of credit conditions,” Edwards noted that historically, “this [kind of] extreme tightening in US bank lending standards to the corporate sector has always coincided with recession.”

Albert doubts this time is different. “Like all the other key indicators screaming recession, investors ignore these reliable early warnings at their peril,” he wrote.