It don’t trouble me
It doesn’t matter
It don’t trouble me
(Effectively, a bit bit now)…

(From “It Don’t Trouble Me” by Jack Mack and the Coronary heart Assault, 1990)

The consensus appears to be shifting to a extra optimistic outlook on the economic system and the market. The economic system has proved extra resilient than anticipated, the Federal Reserve seemingly has reached or is close to the top of its price hike cycle, earnings are anticipated to enhance as we transfer by way of the subsequent a Number of quarters, inflation appears to be trending in the precise route (although continues to be larger than the Fed goal of two%, annualized), and each the inventory and bond markets appear calm.

Look, for instance, on the present Atlanta Fed GDPNow forecast, which, as of September 8, was suggesting 5.6% GDP progress within the third quarter.

So, what’s there to be “bothered” about? Effectively, to me, “a bit bit now.” Whereas the headline numbers appear moderately optimistic, different indicators recommend there could also be extra fragility than indicated within the present consensus outlook.

Let’s have a look.

Different Federal Reserve banks are a lot much less sanguine

The not too long ago reinstated “GDP Nowcast” from the New York Fed at present registers a nonetheless optimistic however a lot decrease 2.25% GDP progress for the third quarter.

In the meantime, the St. Louis Fed is downright curmudgeonly, and at present is estimating a adverse 0.25% GDP progress price for the quarter.

All these Fed banks use totally different measurements for his or her estimates, and it’s not uncommon to see dispersion between them. Nor have any of them confirmed to be particularly correct over time. However the large discrepancies of their respective present estimates recommend there may be extra uncertainty relating to the economic system than many appear to consider.

Small Enterprise House owners Are Decreasingly Optimistic

Small companies (usually outlined as companies with fewer than 500 workers) make use of roughly 50% of all U.S. employees, so how they see the economic system is one thing to concentrate to.

Current survey outcomes are trending within the unsuitable route. The three following charts are sourced from the NFIB (Nationwide Federation of Unbiased Companies), by way of the top of August.

Total optimism is down.

Gross sales are down.

And hiring is down.

Different Indicators

Different indicators additionally appear to be trending within the unsuitable route. The Citigroup Financial Shock Index measures how forecasted financial measurements evaluate to the precise arduous numbers after they are available. If the index is transferring up, it means the precise numbers are coming in above forecasts. If the index is transferring down, it means the info are coming in weaker than forecasted.

This index tends to be “imply reverting” so whereas absolutely the degree is related, what we give attention to is the development (i.e., which route the index is transferring). Presently, the index suggests the info are beginning to are available worse than anticipated.

One other attention-grabbing indicator is shopper sentiment, since consumption drives such a big a part of the U.S. economic system.

Right here we see an attention-grabbing disconnect. The next chart is a visualization between “arduous vs. gentle” financial information. Arduous information is the precise numbers on quantitatively measurable metrics. Delicate information is a wide range of shopper sentiment indicators.

We at present are witnessing an traditionally large dispersion between the “arduous” information and shopper sentiment (although the hole is closing). Why does this matter? As a result of sentiment (or confidence) influences consumption, as might be seen within the backside chart beneath.

One other angle on sentiment is investor sentiment, and one generally reference metric right here is the “put/name” ratio. That’s, what number of traders are shopping for fairness market put choices (a bearish sign) versus name choices (a bullish sign).

Based mostly on this ratio, we see lowering optimism relating to the longer term route of the inventory market.

Lastly, let’s take a look at the labor market. The headline numbers (unemployment price, jobless claims, and so forth.) are proving to be resilient and collectively are one of many base arguments for (a) a common view that the economic system is doing okay, and (b) why the Fed maintains its tighter price coverage.

However take a look at a number of the “numbers behind the numbers.” Job openings, the “hires” price, and the “quits” price are all declining. Job openings and hires are self-explanatory, however the quits price warrants an evidence.

When the quits price is rising, it means that employees are extra snug leaving their present jobs as a result of they’re extra assured they’ll discover one other one. Conversely, when the quits price declines it suggests they’re much less optimistic about discovering one other job, and so select to stay within the one they’ve.

Why does this matter? From a high line view, the info means that jobs have gotten scarcer. At a extra nuanced degree, a declining quits price means that employees have gotten extra cautious, which can translate into their consumption habits.

Conclusions

The track cited firstly of this submit captures properly a sure financial situation—“It don’t trouble me (properly, a bit bit now).”

I’m not suggesting the sky is falling—conversely, I believe we are going to maintain off recession in 2023, although we could discover ourselves in a single in some unspecified time in the future in 2024.

However I get nervous when everybody leans in the identical route—on this case, that we’re in for a “gentle touchdown” or could keep away from recession altogether. Which will show to be true, however I believe there may be extra fragility within the economic system than the headline numbers recommend.

To cite one other track, this time from Billy Joel, “You might be proper/I could also be loopy,” however I believe analyzing the “numbers behind the numbers” is at all times a worthwhile train.