Over the last week including today we got to see some important economic data points like the payroll report and national services and manufacturing activity surveys. Based on the data so far I think the economy is not in a recession yet but the trajectory of the data raises the chances of a recession. Here is the summary of some of the important data points.
- According to the BLS the economy created net 0 jobs in August and 17K private sector jobs. There were some one time affects like the Verizon union strike which caused 45K workers to be not counted and a positive affect due to 22K Minnesota state government workers who came back to work after a strike. The BLS counts jobs based on how many people show up for work not how many are on payroll. Adjusting for these one time affects, you get 23K total jobs created in August and 62K private sector jobs.
- The manufacturing ISM data came in at 50.6 which is pretty weak compared to a few months ago but still indicates expansion. Some of the forward looking indicators like new orders remained below 50 at 49.6. In the ISM surveys above 50 means growing and below 50 is contracting.
- The non-manufacturing ISM data was released today and came in a little bit stronger at 53.3. This a good sign as services accounts for 75% of the economy. The new orders index increased to 52.8 from 51.7 in July and exports saw a very healthy jump to 56.6 from 49.5.
Based on the above data I don’t think the economy was contracting in August. We did have net positive jobs growth even though it was not great and the ISM surveys still showed expansion, especially the more important services sector.
Although we may not be in a recession right now, some commentators have claimed that the slowdown in the data corresponds to a high probability of a recession based on their statistical models.
I think even if we get a recession it will be a mild one. Just like the current recovery did not feel like a recovery I think the recession might not feel very different from what we have already been going through. The main reason I think the recession will be mild is because most businesses in the US have already been operating as if they never got out of the recession. Cost structures are already very lean, therefore I think businesses are very well prepared for a slowdown and will not have to do large scale layoffs or cut back on a lot of projects. New home construction is already scraping at 50-60 year lows, so it really cannot fall much more. So it is hard to see large negative changes in economic activity.
The stock market has already priced in a mild recession in the US. I think the real threat to stock prices from current levels is from overseas, specifically Europe. It is hard to predict how the situation in Europe will play out and therefore a very wide set of outcomes is possible.