A welter of differing economic signals has left investors confused about whether a recession is coming or not. On the optimistic side: Earnings are not as bad as feared, wages continue to rise and unemployment remains very low, at 3.4%.
On the pessimistic side: an analysis by ClearBridge Investments, which weighs 12 factors to assess the state of the economy. It grades them with traffic light colors. As of April’s end, none were green, two were yellow and 10 were red. The month before had two greens and a yellow, with the rest red. In February 2022, 10 of them were green, one was yellow and one was red.
“While we still do not believe a recession has yet started, we are less confident than we were just two months ago, given the dominoes falling,” the investment firm’s report said.
For one thing, the jobs situation is not as benign as it may appear from the small unemployment rate, in ClearBridge’s view. Take unemployment insurance claims. They “have been drifting higher in 2023,” especially in light of revision by the U.S. Bureau of Labor Statistics, which found that claims were higher than originally reported.
Inflation is hurting corporate bottom lines, thus opening the way for more layoffs, the firm concluded. First-time filers are up—not a good portent. Reason: They are a hidden threat to the unemployment stats. Many of the new filers had generous severance packages that only now are running out, thus the timing of their benefit requests, the report explained.
Job sentiment is another indicator that bubbles below the surface. ClearBridge pointed out that, in the Conference Board Consumer Confidence Index, the number of respondents who said jobs were easy to get has fallen from 56.7% slightly more than a year ago to 48.4% lately.
Another little-noticed weakness is that total freight moved by truck saw one of its worst declines on record in April, the study said. (Trucks handle almost two-thirds of the goods moved on land in the U.S.) The American Trucking Association Truck Tonnage Index was down 5% in March, as compared with 12 months prior. This was the first year-over-year decrease since August 2021.
Josh Jamner, an investment strategy analyst at ClearBridge, says the ocean-shipping problem has been resolved and U.S. inventories restocked, but demand has slackened. Hence, lighter truck shipments.
Other indicators, such as housing permits, retail sales and credit spreads (yields have widened between Treasurys and junk bonds), are in the red column. And of course, the yield curve has been inverted for some time, with short-term Treasury paper yielding more than longer-term bonds, a classic sign of an impending recession.
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Tags: ClearBridge Investments, job sentiment, jobless claims, Recession, truck tonnage, unemployment claims, Yield Curve