The horrible condition of consumer sentiment … cracks in the jobs market? … Janet Yellen’s recession tapdancing
Consumer sentiment is in the toilet.
According to preliminary survey data released by the University of Michigan last Friday, consumer sentiment sank to a record low between May and June.
From CNN Business:
Record gas prices pushed down the consumer sentiment index to 50.2, its lowest recorded level, comparable to the trough reached during the 1980 recession, wrote Joanne Hsu, director of the university’s Surveys of Consumers.
All components of the index fell, Hsu said, noting a 24% drop in the year-ahead outlook in business conditions and a 20% decline in consumers’ assessments about their personal finances.
About 46% of consumers surveyed laid the blame on inflation, an increase from 38% in May, Hsu said.
In past Digests, we’ve pointed toward the danger of this degree of negative sentiment.
To be clear, negative investor sentiment can oftentimes be a contrarian buying signal. But negative consumer sentiment is more toxic.
When consumers are worried about their financial prospects, they close up their wallets… which hurts business bottom lines… which slows business growth… which leads to hiring freezes, lower salaries, and/or layoffs … which adds to negative consumer sentiment… which closes up wallets … rinse and repeat.
Of course, there are some products that consumers have to buy, regardless of price – food, gas, and shelter are at the top of this list. Collectively, these three categories make up 63% of household budgets.
Unfortunately, last Friday’s CPI data brought bad news for each of these categories.
From CNBC:
Surging shelter, gasoline and food prices all contributed to the [CPI] increase.
Energy prices broadly rose 3.9% from a month ago, bringing the annual gain to 34.6%. Within the category, fuel oil posted a 16.9% monthly gain, pushing the 12-month surge to 106.7%.
Shelter costs, which account for about a one-third weighting on the CPI, rose 0.6% for the month, the fastest one-month gain since March 2004. The 5.5% 12-month gain is the most since February 1991.
Finally, food costs climbed another 1.2% in May, bringing the year-over-year gain to 10.1%.
So, with more dollars being sucked up by this 63% weighting of a household budget, that leaves fewer dollars for discretionary spending elsewhere.
Too much of that, and we have the recession that many are now fearing is just a matter of time.
***But hold on – what about the “strong economy” the Fed claims we’re enjoying that can handle much higher rates?
And what about the jobs market, which features the best conditions for employees seeking jobs in decades?
After all, it was two months ago that claims for unemployment insurance fell to their lowest level in more than 50 years. Despite atrocious inflation, isn’t the overall economic picture still pretty good?
The problem is, “the overall economic picture” encompasses too much. It’s too broad and vague. There’s no single indicator or metric to give us a definitive answer.
For example, let’s zero in on the labor market.
Two weeks ago, we learned that nonfarm payrolls increased by 390,000 in May. That was above the 328,000 Dow Jones estimate.
Even better, the unemployment rate held at 3.6%. That’s just above the lowest level since December 1969.
This should be great news, right?
Well, yes, it is.
But the labor market is ever-changing. And we want to know where we’re going, not where we are.
Where might we look for hints about that?
***Well, the tech VC sector is often seen as a leading indicator for both stocks and the economy
When future economic conditions appear sunny, venture capital flows into the tech sector, fledgling businesses hire top talent as they build out their teams, and tech revenues flow as consumers open their wallets for these new tech products/services.
The opposite can be true as well. When economic conditions worsen, venture funding for cutting-edge tech projects dries up, which leads to layoffs, and if things get bad enough, tech ventures close their doors.
So, forgetting the broad jobs market, what’s happening with the VC tech jobs?
From Chartr:
Bird, the company most famous for its electric scooters and bikes, is laying off 23% of its workforce this week according to an internal memo…
Although notable, Bird is only the latest in a long list of tech layoffs.
The site Layoffs.fyi has been tracking tech startup job losses since the pandemic started, and it’s starting to show a marked increase in layoffs in the last few months.
In May the site tracked 16,935 jobs lost, the highest monthly reading for 24 months, only behind the ~26,000 tech startup jobs that were lost during the early months of the pandemic.
I’ll add that Layoffs.fyi has June’s layoffs already clocking in at 4,922.
This is not a good sign of what may be coming for the broader jobs market.
***So, is a recession now a certainty?
No, there are still reasons to believe the Fed can engineer the “soft-ish” landing that Federal Reserve Chairman Jerome Powell is attempting.
However, there’s a growing list of flashing warning signs – perhaps not least of which is Treasury Secretary Janet’s Yellen’s refusal to admit there are any warning signs.
Last Thursday, in an interview at The New York Times’ economic forum, Yellen said:
There’s nothing to suggest that there’s a recession in the works.
No?
So, the unexpected Q1 GDP decline of 1.4% annualized makes no suggestion?
The laundry list of earnings calls featuring lowered profit forecasts and reduced guidance is immaterial?
The uptick in consumer debt spending is irrelevant?
The worst consumer sentiment in 42 years is fake news?
The 68% of CEOs surveyed by The Conference Board who said we’re headed into a recession is smoke and mirrors?
To be clear, Yellen might believe she has data that explain away these issues. But her unwillingness to even acknowledge these warning signs as potential harbingers of a recession feels entirely inauthentic.
***Though Yellen seems unconcerned, keep your eyes (and wallet) on this key recession indicator
Back in March, Bloomberg featured research from Pictet Asset Management studying the correlation between oil prices and recessions.
From Bloomberg:
In the past 50 years, every time oil prices, adjusted for inflation, rose 50% above trend, a recession followed, data from Luca Paolini, chief strategist at Pictet, show.
Brent, the international gauge for prices, climbed well above $110 a barrel this week, crossing that threshold on worries about disruption to Russia’s exports after the country invaded Ukraine.
I’ll note that “this week” in the quote above was three months ago. As I write Monday morning, Brent crude trades at $120.11, and hasn’t been under $110 a barrel since early-May.
A recession isn’t a certainty, but we’d be fools to stick our heads in the sand at this point.
We’ll keep you updated.
Have a good evening,
Jeff Remsburg
