Juggling Dynamite

Hoisington’s Q2 Review and Outlook is now available; see Monetary and Fiscal Extremes.

One of several standout charts shows the US Net National Savings Rate since 1929, negative in 2024 for only the second time ever, as the federal budget deficit (dissaving) exceeds the total of household, corporate and foreign savings.
Hoisington notes that, as in 2008, negative national net savings (NNS) create an unusual and significant restraint on economic growth that is increasingly driving down employment, inflation and bond yields (Treasury prices rising):

The Quarterly Census of Employment Wages (QCEW) of 11 million institutions recorded an extremely sharp cyclical deterioration in the third and fourth quarters of 2023. Confirming the QCEW, household employment was nearly unchanged in the last 12 months, with a significant loss in full-time jobs. Real personal expenditures for goods fell in the first half, with significant weakness in durable goods. Despite AI spending, the dominant monthly component of capital spending (shipments of nondefense capital goods, excluding aircraft and adjusted for inflation) turned down in the second quarter.
The critical measures of housing demand set new lows this year, and average hours worked in June fell below the levels when the economy entered the 2001 and 2007 recessions.

Reflecting poor business conditions in the Euro Area, China, Japan, the UK, other trading parties, and the strong dollar, the high multiplier real trade deficit was 8.6 % worse in May than a year ago.

Cyclical economic deterioration and constrictive monetary and fiscal factors point to a weaker economy, less inflation, and lower Treasury bond yields.

Canada’s June unemployment rate of 6.4% was up 160 basis points from the cycle low of 4.8% in June 2022. Since the 1970s (as shown below courtesy of RBC), Canada has never had this trough-to-peak rise in the unemployment rate without the economy going through a recession (blue bars). The increase following the 2000-03 dotcom bust maxed out at 150 basis points, and Canada did not officially follow America into recession (though our stock market halved along for the ride).

Technically, to date, the Canadian economy has narrowly avoided the consecutive headline GDP declines that would qualify as a recession. However, that’s only due to adding 2.1 million new consumers to the economy from Q2 of 2022 to Q1 of 2024. RBC economists explain that Canada’s economy may not be in a recession, but it feels like one:

Without higher population boosting demand, the Canadian economy almost certainly would have contracted outright over last two years. Per person after inflation household spending is 2.6% below its post-pandemic peak and down 2% from pre-pandemic 2019 levels as higher prices and interest rates cut into purchasing power. Per capita GDP has declined in six of the past seven quarters to 3.1% below 2019 levels. The per capita GDP decline in Canada has been milder than in more recent downturns. In 2008, real per capita output fell 5% from peak to trough, similar to the contraction in the early 90s. The drop in the 1980s was a larger 7%. But the current per capita GDP decline is larger than in earlier periods that were considered recessions.

The BoC’s easing cycle is underway after an initial 25 basis point interest rate cut in June. We expect three additional back-to-back cuts in subsequent meetings will bring the overnight rate to 4% by year end.

The loosening of monetary policy to less restrictive levels will ease some of the pain. Mortgage renewals in 2025-26 will still challenge households, but it should be manageable as long as the slowdown in labour markets does not significantly intensify.

Counting on labour market strength is a low-probability bet at this point. Historically, (as the chart shows above) the unemployment rate accelerates through recessions and well into subsequent economic recoveries while central banks slash interest rates. The present rate-cutting cycle has barely begun in Canada and, not yet, in America.

The US Conference Board of Leading Economic Indicators (LEI Index) declined for a 30th month in June (purple line below since 1959, courtesy of Advisor Perspectives) and is now -14.2% from the cycle peak in December 2021.
As shown, since 1959, an LEI contraction of this magnitude has never happened outside of an officially declared recession (grey bars), and the lag between the peak LEI and the onset of the recession (retrospectively) has ranged from 1 to 20 months. The Conference Board explains on their website as follows:

“The decline continued to be fueled by gloomy consumer expectations, weak new orders, negative interest rate spread, and an increased number of initial claims for unemployment…Taken together, June’s data suggest that economic activity is likely to continue to lose momentum in the months ahead.”

If an NBER-declared US recession ends up being retrospectively dated as of October 2023, it will have been 22 months since the LEI peak in December 2021, second only to the 20-month lag that preceded the 2008 ‘great’ recession.

The discussion below offers further context on current economic trends, employment, and housing. It’s worth the listen.

Everyone’s getting fired across all industries, says Danielle. U.S. recession is here and the housing market is crashing. Here is a direct video link.