US data exacerbating concerns of recession

The ever-present fears of recession that have accompanied the Fed’s aggressive efforts to return CPI to target will have been exacerbated today by the release of the latest US corporate earnings, factory activity and jobs openings numbers.

The latest earnings figures showed that the travel, leisure and automotive sectors are all struggling, posting earnings numbers below expectations and accompanied by warnings that the outlook going forward is looking increasingly difficult. Although today’s releases are just a snapshot of the US corporate sector as a whole, they have been enough to stoke fears about the strength and durability of corporate earnings as we move through H2 and into 2023 and have been enough to see the rally in stock markets that was being seen lose momentum. Fears remain that a trough in earnings has yet to be reached, and while the US macro picture has turned out to be stronger than expected, the realisation that the full impact of the Fed’s tightening is only just now starting to come through is engendering a sense of pessimism in the markets that the worst in the corporate sector is yet to be seen. Adding to these fears is the concern that the strong picture of consumer spending painted at the start of the year is fading rapidly, with consumer demand tailing off just at the same time as the inevitable impact of the US banking crisis starts to negatively impact corporate finances.

Adding to this somewhat gloomy outlook was the picture presented today of US factory output, where the ISM manufacturing survey for July showed activity contracted for the ninth month in a row. The report very much signals how weak demand for US products, both at home and abroad, is acting as a drag on activity, and that the much hoped for recovery in the Chinese economy has failed to provide an offset to weaker US consumer demand. Of course, some of this weakness reflects the tilt in consumer preferences towards spending on services rather than goods, an inevitable change that was going to be seen after the lifting of the pandemic lockdowns. But with US companies facing an increasingly hostile financial environment, this slowdown in demand leaves the near-term outlook for manufacturing outlook looking difficult and the fear is that it will directly lead to a reduction in employment as firms reduce the size of workforces to match production levels.

This fear was presented in black and white by today’s JOLTS numbers, which showed US job openings falling to their lowest level since April 2021 and suggesting that the demand for labour is finally starting to turn, adding to the growing body of evidence suggesting that the labour market is finally normalising. The report showed that hirings fell to their lowest level since February 2021. But with the figure for layoffs also falling the report suggests that companies are still reluctant to release staff, presumably still fearful that the previous difficulties and high costs associated with recruitment have not yet gone away. However, for workers themselves, the opposite scenario is growing. The ‘quits’ rate – the measure of how many workers voluntarily left their jobs as a share of total employment – fell 2.4% to match its lowest reading since February 2021 also and suggests fears over job security are rising.

The FOMC has previously indicated that it places a lot of weight on the JOLTS survey and today’s report, read in conjunction with the softer pricing data seen in July, will provide ammunition for the ‘doves’ on the FOMC to argue more strongly that the current interest rate hiking cycle should now be brought to an end.