Is there any hope left for a macro bear case around the US economy?
It’s tempting to say “no.” Or, actually, I’d frame it differently. I’d suggest US recession calls have mostly expired now (because a call with no shelf life isn’t a “call”), and as such, intellectually honest forecasters unconvinced of the soft landing narrative are compelled to make a new case against it. The same goes for bearish equity market calls.
The US recession didn’t happen on time and stocks didn’t revisit the October lows. Period. You have to concede that first in order to reestablish credibility. If you want to believe that any recession or stock swoon that does eventually play out validates your original forecast (i.e., if you want to believe your call wasn’t actually expired), that’s your business, but it’s best to keep it to yourself. Nobody wants to hear you shout “I told you so!” about a 10% stock correction that happens 12 months after you called for a 20% plunge.
The same goes for a shallow recession that comes calling 18 months after you said a downturn was imminent. Considering it’ll take the NBER forever and a day to “confirm” you were right, it could be years (plural) before you get proof of your recession. As I’m fond of reminding readers, the fact that another recession is always inevitable, and the generous temporal leeway we afford forecasters when it comes to what counts as being “right,” gives the whole thing an air of silliness. “Eventually it’ll rain again,” isn’t a prediction.
As long as you accept all of that (at least tacitly), you can still make the recession case. In his latest, BofA’s Michael Hartnett offered one version, and thanks to his exceedingly engaging style, it made for a good, quick read.
The US consumer, Hartnett said, is “buoyed” both by excess savings and a “new secular belief that government intervention [like] stimulus checks, energy rebates and guaranteed bank deposits, nullifies the need to save.” When you combine that with the “new super-strong, post-COVID labor market” characterized by “labor hoarding,” it’s not difficult to explain how consumer spending managed to rise more than 3% during the first half “despite fears that a credit crunch would cause a recession,” he went on.
But Hartnett presented a list of caveats — a bunch of “however”s, if you like. Real retail sales are falling, he noted. That’s a bad omen. In fact, it’s “faithfully coincided” with every US recession going back more than half a century, as shown below.
When real retail sales fall more than 3% YoY, you typically get a hard landing.
Moreover, the US household saving rate is up more than 1.5pp from the lows. That too bodes ill if past is precedent, and if the trend extends.
Looking back across history, a two- to three-point increase in the personal saving rate is recessionary. In the current context, that’d mean anything above 5% could be considered a canary.
Hartnett also reminded market participants that most estimates suggest the seemingly bottomless well of pandemic savings is finally set to run dry at some point later this year. That’ll be exacerbated by the resumption of student loan payments for some Americans, or so goes the narrative.
Finally, there’s the unemployment rate. It’s plainly still low, where “low” means it’s basically never been lower. But the rate of change matters. The Sahm rule is a testament to that. Hartnett made a simpler observation: Generally speaking, when the unemployment rate rises between half a point and a full point, it’s bad news. Currently, that means a jobless rate too far above 4% would be “no bueno.”
He summed it up. “Soooo… real retail sales -3% YoY, savings rate >5-6% [and/or] an unemployment rate >4-4.5%” would mean a recession is “nailed-on,” Hartnett wrote, adding that although it “ain’t happened yet, that’s where it’s trending.”
