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More Evidence The Recession Started

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The economy continues to decelerate, and the most recent data adds significant evidence to the possibility the economy entered a recession last year or at the start of this year. While a recession may already be underway, the deterioration in the labor market has not proven sufficient for the Federal Reserve to soften its continued hawkish policy stance.

In this update, we’ll review the changes and revisions to coincident economic data and zoom in on the initial jobless claims data, which will be our most real-time and reliable labor market measure.

The Bureau of Economic Analysis recently reported the April update for Personal Income and Personal Consumption. The BEA significantly revised the Personal Income data from September 2022 through March 2023.

Real personal income less transfer payments, our preferred income metric, only posted a 0.1% gain since September of last year compared to a previously thought 1.0%.

Since real income feeds into the Aggregate Coincident Index, we can see a slight adjustment lower in the historical growth rate. The economy is slightly weaker than previously thought before these revisions to wages. Over the last six months, the Aggregate Coincident Index has averaged 1.2% compared to a previously thought 1.4%.

If we look at the six NBER monthly coincident indicators, we can see that three of the six indicators are either flat or down compared to September 2022.

Real personal income, industrial production, and real retail sales are the weakest parts of the economy, while employment and broad personal consumption have continued to make gains.

This is extremely common at the start of recessions, which is why the data today looks clear cut like a recession is starting to get underway.

Real retail sales and industrial production hold an average growth rate of 0.1% at recession starts, compared to nonfarm employment and broad personal consumption, which hold an average growth rate of 1.4% at recession starts.

In fact, there has never been a recession in the past where real retail sales and industrial production didn’t have a lower average growth rate than employment and broad personal consumption.

In addition to the six monthly coincident indicators, when dating recessionary periods, the NBER looks at one quarterly series. That quarterly series is actually not real GDP but rather the average of Real GDP and Real GDI, gross domestic income.

Because the income side of the economy is much weaker than previously thought, contrary to the strong wage narrative, real GDI has started to contract, and the average of real GDP and real GDI has been negative in four of the last five quarters.

So the NBER looks at seven key coincident variables, six monthly and one quarterly. Four of the seven critical variables are either flat or down relative to September 2022, which builds a reasonable case for a recession beginning late in 2022 or at the start of 2023, pending a continued deterioration in labor market data.

In real-time, the monthly BLS jobs report will offer, at best, a fictitious reading on the current state of labor market gains. This chart shows the 12-month rolling payroll revisions, which clearly demonstrates that the BLS data does not work in real-time as the revisions are completely cyclical.

Moving forward, this data suggest that downward revisions to BLS payroll data will be the rule, not the exception, as is the case in all pre-recessionary periods of the past.

While the BLS data will muddy the real-time picture, we can use the more reliable initial and continued jobless claims data for a better gauge of when the cracks in the labor market start to intensify, the only thing that will gain the attention of the Federal Reserve other than a significant financial market event.

Let’s have a look at jobless claims data…

This is a sample of the EPB Market Update, Week 21. 

 

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Eric Basmajian is an economic researcher focused on providing an advanced and comprehensive analysis of the business cycle.

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