VIPs
- Duke University/CFO Global Business Outlook survey titled “Recession Considered Likely by Year-End 2019” has been the media buzz the last two days
- 48.6% of the CFOs responded in the survey expect the U.S. economy will be contracting by this time next year; their concern is resulting in CFOs not just talking about but rather curtailing if not cutting capital expenditure spending and hiring
- Tech spending expectations appear to lead the economy and the manufacturing sector; cuts in manufacturing hours corroborate signs that demand is slowing
- At 41.9 hours, the manufacturing workweek now matches its January low and a hair shy of the level that prevailed throughout the profits recession of 2015-2016
- While modern recessions have been presaged by an inverted yield curve, balance sheet recessions such as the six that followed the Great Depression did not
- CFOs are the architects of overleveraged corporate America; the next recession will likely be a result of balance sheet buried in debt distinguishing it from those in recent history
What started as Atellan Farces in the streets of Rome landed at the corner of North Avenue and Wells Street in Chicago’s Old Town neighborhood. Been to Second City have you? If so, you’ve been entertained in the fine art of commedia dell’arte all’improvviso, what we Italians at QI can translate for you to improv. Legends who broke through to adoring public audiences on Second City stages, thinking on their feet and defying canned scripts, include Bill Murray, Tina Fey, Mike Meyers and Gilda Radner.
We anticipate that this nation’s chief financial grand poohbahs will be trying their hands at improv in the coming year. The comportment of the leveraged loan market suggests the GE bond kerfuffle is not a one-off. We’ll delve deeper into this subject in our 2019 outlook, but the unleashing of credit volatility will shift the discussion from the share buybacks markets have come to know, love and dare say, rely upon, to the shareholder unfriendly scourge of debt retirement.
The one cohort that will be least ruffled by such a development appears to be CFOs themselves. Over the last two days, the media has hyperventilated over the latest Duke University/CFO Global Business Outlook. Granted, the survey’s a bit new – it’s only been published for 91 consecutive quarters – so maybe reporters were unfamiliar with it. On the other hand, not every survey is titled “Recession Considered Likely by Year-End 2019.”
In the event you missed it (how could you?), 48.6% of finance chieftains surveyed expect the U.S. economy will be contracting by this time next year. Funny thing, they’re worried they’ll have to rein in capital spending and hiring plans as a result of being less than cheery this holiday season. As best we can tell, their words speak more softly than their actions. It must be a savvy maneuver to be one step ahead of the competition.
All we can say is look out below. As you can see in today’s nifty tri-color chart, as goes tech spending expectations, so goes the whole economy, led by that great leading sector — manufacturing. Wait a sec…tech spending and manufacturing? Are we daft?
In the event you’re new to QI, a) welcome and b) we’re all about crayons and cycles. Tech equipment is a staple of business capital spending. It thus draws the contours of the cycle in manufacturing hours worked, which we treat as the leading edge of the entire factory sector – it’s the first thing to get cut at the first whiff of waning demand.
At 41.9 hours, the manufacturing workweek now matches its January low and is a nick above the level that prevailed throughout the profits recession of 2015-2016.
You may note that the slope of rapidly ratcheting back spending plans is steeper than the workweek and actual output. That tells you all you need to know about where the workweek is headed. If CFOs are verbalizing plans to cut back spending, they’re acting upon those plans today, starting with GM. We would note that we are hearing from our business community contacts that GM’s move was indeed that of a trailblazer, as in layoff announcements are multiplying across America.
Perhaps most telling was the observation made by Campbell Harvey, a founding director of the survey. In his estimation, “All of the ingredients are in place: a waning expansion that began in June 2009 – almost a decade ago – heightened market volatility, the impact of growth-reducing protectionism, and the ominous flattening of the yield curve which has predicted recessions accurately over the past 50 years.”
Shall we count the ways? Declining domestic and global demand which hits top lines, stock market losses that make C-Suite occupants cranky, and the validation of a flattening yield curve.
Here is where QI wanders off the reservation. But be a pal and indulge us. CFOs are also intimately familiar with their balance sheets, which brings us back to the record levels of leverage being shouldered by American firms. What if CFOs believe we’ll be in recession within a year because of this debt load?
That can only mean one thing: The efficacy of the yield curve’s predictive power has been harmed in the aftermath of the first balance sheet recession the United States has suffered since the Great Depression. The shortest timeframe example we have is the 13 months that followed the inversion of February 2000 that flagged the onset of recession in March 2001.
As for the lack of precedent argument, the impossibility that we enter recession without the yield curve first inverting, try the six recessions that followed…the Great Depression. Yield curve inversions are a modern phenomenon. CFOs, those in charge of hiring, firing and spending, have said as much. If nothing else, you can look forward to entertaining improv on 2019 earnings calls.