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Asset AllocationMay 8, 2023

Statistical Recession Indicators Look Ominous

ClearBridge Investments' 10 signals of an economic downturn are now blinking red.

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.

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“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.

UK Regulators Warn Pensions to Check Data After Capita Breach

TPR, FCA and ICO are urging Capita clients to find out if any of their data has been stolen.

By Michael Katz

U.K. regulators are asking hundreds of pension plans and other firms to check to see if any of their data has been stolen following a security breach at pension administrator Capita plc.

Capita is one of the largest third-party administrators in the U.K, and, according to the firm, administers more than 450 pension plans with 4.3 million participants. The company announced in early April it had “experienced a cyber incident” on March 31 that mainly affected access to internal applications.

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After investigating the matter, the firm determined that the initial unauthorized access of data took place on or around March 22 and was interrupted by Capita on March 31. Although the company said the interruption significantly restricted the hack, it also said there was “some evidence of limited data exfiltration from the small proportion of affected server estate which might include customer, supplier or colleague data.”

As a result of the breach, The Pensions Regulator, the U.K.’s watchdog for workplace pensions, sent a letter to hundreds of pension plan trustees to inform them of risk to their plan’s data. The Financial Conduct Authority and the Information Commissioner’s Office, which is the U.K.’s independent body for upholding information rights, are also urging companies to find out if any data has been stolen.

“We are continuing to closely monitor the incident at Capita,” said a TPR spokesperson, who declined to share the letter sent to pension trustees. “We are engaging directly with the company regarding their communications with schemes, and we are in discussions with other regulators, trustees of schemes and relevant organizations.”

The FCA said it continues to engage with Capita to understand the extent of any data compromise and impact on the firms to which they provide outsourced services. “We have also written to FCA-regulated firms that are clients of Capita to ensure they are fully engaged in understanding the extent of any data compromise,” the FCA said.

The ICO released a statement that other affected organizations “should also consider their position and report data breaches where necessary.”

The ICO said companies must notify it within 72 hours of becoming aware of a personal data breach, unless it does not pose a risk to people’s rights and freedoms. It also cautioned that if a firm decides a breach does not need to be reported, “they should keep their own record of it and be able to explain why it wasn’t reported, if necessary.”