Economists are going back and forth about whether a recession in the U.S. is imminent or not, and this will probably go on until the nation is indeed plunged into one. Not everyone is convinced by all the recession talk, although some economists believe part of the U.S. economy is already in a recession and that the risk of the rest of the nation following suit is growing.
Strength in the U.S. labor market debunks recession talk
Gluskin Sheff Chief Economist and Strategist David A. Rosenberg is of the opinion that the U.S. is not in a recession right now, emphasizing in his “Breakfast with Dave” note dated Feb. 9 he thinks the labor market is just too solid right now. Of course he also notes that this might change at any time, but his main point here is that over the last three months, the number of aggregate weekly production and nonsupervisory work hours is at a “very decent” annual rate of 3.3%. He adds that this is more than triple what the U.S. was seeing in the middle of last year.
Further, he said when a recession is beginning, this metric is usually already negative with an average annual rate of 0.4% at the onset of a recession. Historical numbers suggest that it will take a year or more for the labor market to fall all the way down from the current pace to where it would have to be in order for him to say there’s a recession.
Additionally, he said the diffusion rate (which measures the share of industries that are adding jobs) for private payrolls usually is at about 39%, but right now it’s much higher at 59.5%.
Manufacturing sector turning around?
Morgan Stanley economists think the U.S. Industrials sector is already in recession, and indeed the manufacturing sector has been the second weakest performing in the U.S. economy after only Energy. However, Rosenberg says he’s seeing signs that a turnaround is in progress as the ISM manufacturing new orders-to-inventory ratio has climbed to its highest level in 13 months, leading the overall index.
Further, last month, manufacturing employment climbed 29,000 after bottoming out in September. In fact, since September, the sector has seen net adds of 47,000 jobs, although these numbers have not received much attention. Rosenberg also noted that the factory workweek also edged higher by 0.2% month over month in January, while overtime production and nonsupervisory hours grew 2.4%
The Gluskin Sheff economist also noted that the manufacturing sector diffusion index jumped to 63.9% last month from the 55.1% it stood at in both of the prior two months. He said it’s clear that a recession has begun when this metric tumbles under 40%, adding that “we are light years away from that.”
Rosenberg admits that the economy is indeed in turmoil, but he doesn’t seem to think a recession is immediately around the corner, which puts him in the opposite camp of Bill Gross, who predicts one in the next six to 12 months.
All graphs in this article are courtesy Gluskin Sheff.
