CONTRIBUTORS
Jeffrey Schulze, CFA
Head of Economic and Market Strategy
Josh Jamner, CFA
Investment Strategy Analyst
Key takeaways
- The ClearBridge Recession Risk Dashboard saw three negative signal changes this month in Truck Shipments, Jobless Claims and Job Sentiment, pushing it deeper into red or recessionary territory and suggesting a significant downshift in the economy.
- As leading indicators of labor market health, a worsening of Job Sentiment and Jobless Claims suggests net job losses and a rising unemployment rate may emerge later in 2023. This, in turn, is likely to crimp consumption which is the backbone of U.S. economic growth.
- A sharp decline in truck freight volumes provides further evidence of an economic slowdown on top of supply chain normalization, which appears to have largely played out.
Stock market downplaying macro weakness, for now
A better than feared start to earnings season coupled with lingering recession fears is causing a tug of war between the bulls and the bears. Consequently, U.S. equities were remarkably steady last month, with the S&P 500 Index trading in a narrow 2.5% range the entire month and closing up just 1.6%. Despite the rangebound market, April economic data was consistently weak, as evidenced by the US Citi Economic Surprise Index which declined from 57 to 22 during the month. Given this deterioration, it is unsurprising that the ClearBridge Recession Risk Dashboard (Exhibit 1) saw three negative signal changes this month, with Truck Shipments and Jobless Claims worsening from green to yellow, and Job Sentiment worsening from yellow to red.
Exhibit 1: ClearBridge Recession Risk Dashboard
Source: ClearBridge Investments.
Two of these indicators – Job Sentiment and Jobless Claims – are leading indicators for the health of the labor market which has remained remarkably resilient. If history is a guide, net job losses and a rising unemployment rate should emerge later in 2023. Focusing first on Job Sentiment, individuals are reporting a more challenging environment for finding work. The share of individuals responding that jobs are plentiful in the Conference Board Consumer Confidence Index® has fallen from 56.7% just over a year ago to 48.4% currently (see Exhibit 2), while those responding that jobs are hard to get has risen but remains low. The difference between the two tends to presage slowdowns in consumption – individuals hold off on marginal purchases given less confidence in their ability to find work if needed – and has rolled over in recent months.
Exhibit 2: Job Sentiment Showing Fatigue
Data as of March 31, 2023, latest available as of April 30, 2023. Source: FactSet, Conference Board, National Bureau of Economic Research.
The second weakening labor market indicator is Jobless Claims, which has been drifting higher in 2023 (see Exhibit 3). In early April, the Bureau of Labor Statistics released updated seasonal adjustment factors for jobless claims that impacted the last several years. One impact of these changes was that jobless claims were stronger (lower) during the summer of 2022, but weaker (higher) in early 2023 than previously believed. Jobless claims have been choppy over the past two months – as is their nature and why we (and many) focus on their 4-week moving average – but have clearly risen into a higher range relative to what was seen in the second half of 2022. This step-up in claims is unsurprising as companies face margin pressure from reduced pricing power, coupled with stickier cost structures.
Exhibit 3: Jobless Claims a Canary in the Coalmine
Data as of April 21, 2023. Source: Bloomberg, BLS.
The increase in the number of individuals filing for first-time unemployment benefits bodes poorly for future consumption, particularly given that high earners make up a disproportionately large share of the rise in those filing for benefits today, which is uncommon. This suggests that generous severance packages granted at termination may be running out. It similarly bodes poorly for future economic growth if these workers are unable to find new employment, a prospect that appears more challenging given deteriorating Job Sentiment.
The labor market is not the only area of the economy showing strain. Seventy-two percent of total freight moved each year goes on trucks, and the American Trucking Association’s Truck Tonnage Index saw one of its worst monthly declines on record in April going back to the early 1970s (see Exhibit 4). Supply chain pressures appear to have normalized at this point with the New York Fed’s Global Supply Chain Pressure Index dropping to -1 standard deviation from +3 just over a year ago. This, in turn, is contributing to the decline in freight volumes as bottlenecks have eased, inventories have been restocked and less “stuff” is moving through the economy overall, portending a further slowdown in activity.
Exhibit 4: Truck Tonnage Hits the Brakes
Data as of March 31, 2023. Source: ATA, NBER, and Bloomberg.
Taken together, these three dashboard signal changes support the notion that the U.S. economy experienced a substantial downshift in economic activity in March and April. The dashboard now has 10 red and two yellow underlying signals, along with an overall deep red or recessionary reading. Our base-case view for the last 10 months has been that a recession was the most likely outcome, although the timeframe was always uncertain and never imminent. While we still do not believe a recession has yet started, we are less confident than we were just two months ago given the dominoes falling (dashboard signal changes) and think the onset of a recession is likely within the next few quarters. Given this assessment, we continue to believe tilts toward defensive and high-quality equities will be rewarded in the coming months.
Definitions
The ClearBridge Recession Risk Dashboard is a group of 12 indicators that examine the health of the U.S. economy and the likelihood of a downturn.
The S&P 500 Index is an unmanaged index of 500 stocks that is generally representative of the performance of larger companies in the U.S.
The Citigroup Economic Surprise Index tracks whether a core set of economic data series has been coming in under expectations, at expectations, or over expectations.
The Conference Board (CB) is a not-for-profit research organization that distributes vital economic information to its peer-to-peer business members.
The Consumer Confidence Index (CCI) is a survey, administered by the CB, that measures how optimistic or pessimistic consumers are regarding their expected financial situation.
The Truck Tonnage Index is an index that measures the gross tonnage of freight which is transported by motor carriers in the United States for a given month.
The Global Supply Chain Pressure Index from the Federal Reserve Bank of New York integrates transportation cost data and manufacturing indicators to provide a gauge of global supply chain conditions.
Standard deviation is a statistical measurement of how far a variable, such as an investment's return, moves above or below its average (mean) return. An investment with high volatility is considered riskier than an investment with low volatility; the higher the standard deviation, the higher the risk.
WHAT ARE THE RISKS?
Past performance is no guarantee of future results. Please note that an investor cannot invest directly in an index. Unmanaged index returns do not reflect any fees, expenses or sales charges.
Equity securities are subject to price fluctuation and possible loss of principal. Fixed-income securities involve interest rate, credit, inflation and reinvestment risks; and possible loss of principal. As interest rates rise, the value of fixed income securities falls. International investments are subject to special risks including currency fluctuations, social, economic and political uncertainties, which could increase volatility. These risks are magnified in emerging markets. Commodities and currencies contain heightened risk that include market, political, regulatory, and natural conditions and may not be suitable for all investors.
U.S. Treasuries are direct debt obligations issued and backed by the “full faith and credit” of the U.S. government. The U.S. government guarantees the principal and interest payments on U.S. Treasuries when the securities are held to maturity. Unlike U.S. Treasuries, debt securities issued by the federal agencies and instrumentalities and related investments may or may not be backed by the full faith and credit of the U.S. government. Even when the U.S. government guarantees principal and interest payments on securities, this guarantee does not apply to losses resulting from declines in the market value of these securities.