VIPs
- The Labor Curve, the spread between Jobs Hard to Get and Fewer Jobs from Conference Board’s consumer survey, is inverted and flashing a late-cycle signal; past inversions beyond -3 were all followed by a recession, making July’s -6.3 reading all the more concerning
- Per Cox Automotive, July saw a 15.2 million SAAR in auto sales, up 4% YoY, but well off Q2’s 51% advance; given that all negative Labor Curve episodes have preceded slowdowns in auto sales as well, it’s likely that a slowing trend in vehicle sales looms on the horizon
- The Revenue-Selling Prices spread in the Dallas Fed’s Retail Survey closely tracked consumer spending before falling off in June and July; with Markit also projecting spending growth to dip from 11.1% QoQ in Q2 to 2.8% in Q3, recession risk remains underpriced
After the September 11, 2001 terrorist attacks, Bruce Springsteen drove to the beach in Asbury Park, New Jersey. A passenger in the next car recognized him, rolled down the window and yelled, “We need you now!” This sincere plea culminated in Springsteen releasing his twelfth studio album, The Rising, 19 years ago this week. For the first time in 18 years, Bruce was reunited with the E Street Band, his primary backing band since 1972. In the title track, “The Rising”, Springsteen described one of the most powerful 9/11 images. In an interview with “Nightline’s” Ted Koppel, Bruce elaborated: “…I’d read in the paper, some of the people coming down were talking about the emergency workers who were ascending. And you know, that was just an image I felt left with, after that particular day. The idea of those guys going up the stairs, up the stairs, ascending, ascending.”
In 46 days, we will commemorate the 20th anniversary of September 11th, one of the most hallowed days in American history. In Grammy-award winning “The Rising,” Springsteen transmuted the solemnity of the time into a timeless response, a musical testament to the power of resilience and hope.
The “rising” takes on a different connotation in financial markets and macroeconomic fundamentals. Take the S&P 500. It’s been on a nearly unbroken tear since its March 23, 2020 post-COVID low point. Conversely, the Labor Curve abruptly halted its upward movement after jumping sharply in 2020’s second quarter. Moreover, at the start of the third quarter, it’s flashing a late-cycle signal (red line). We are, after all, 15 months into recovery after a two-month pause that’s hard to call a “recession.” Given the recovery that followed the second-fastest recession on record — which ended in the six months through July 1980 — lasted all of 12 months, it’s fair to draw parallels.
Care of the Conference Board’s consumer confidence survey, the Labor Curve pits the negative responses on current employment conditions (“Jobs Hard to Get”) and future employment expectations (“Fewer Jobs”) against each other. In past analyses, the Labor Curve has soft-data-checked an inverted yield curve. Today, it’s juxtaposed against the trend in total light vehicle sales.
Past inversions in the Labor Curve that exceeded -3 provided accurate forward guidance for end-of-cycle dynamics; each time a recession followed. That makes the current environment that much more curious. The second quarter of 2021 posted a -3.6 average and July clocked in with a -6.3 reading. Is Chicken Little about to pull the fire alarm?
Walking back from the ledge, all the negative Labor Curve episodes illustrated in the left chart foreshadowed material down cycles in auto sales. With normalization about to take hold at the start of the third quarter – Cox Automotive’s July 15.2 million seasonally adjusted annual rate (SAAR) stood about 4% above a year ago, following the second quarter’s 51% year-over-year advance – we can’t help but think that we’re at the precipice of a downturn in vehicle sales.
For July only, Cox noted that, “The sales pace has really been falling throughout the month – and quickly.” Set aside the persistent upbeat tone from this purveyor of auto data. The most recent development, the forecast of a third sequential negative sign in front of year-over-year car sales, implies a loss of momentum as summer months lose sunlight in August and September.
Backing Cox’s expectations, at 3.4%, the Conference Board reported that plans to buy a new vehicle remained at recessionary levels, well below the February 2020 pre-pandemic level of 5.8%. The July University of Michigan consumer survey echoed the deterioration as auto buying conditions fell to a level of 80 (on a 100 breakeven), a net -20% indicating it’s a bad time to buy. The last time things were this upside down for buying conditions, you were tuning in to the then novelty of MTV in the early 1980s.
Late cycle talk and risks of falling car sales – that’s both demand and supply driven – have us thinking the consumer demand rotation might not be as smooth as forecasters had hoped. It begs the question, “Is consumer spending at risk of a negative quarter?”
The GDP trackers at IHS Markit aren’t making that extreme of a call though they do expect real consumer spending growth to moderate dramatically, from 11.1% in 2021’s second quarter to a 2.8% quarter-over-quarter annualized pace in the three months ended September. Without any hard data for the July-September period, the loss of momentum is purely model-based.
To reduce the speculative element, let’s backcheck the forecast using fresh data from Texas, which comprises 8% of total U.S. consumer spending and a weightier 11% of all vehicle purchases. With a footprint like that, Texas is a robust proxy for the national economy.
On that note, the Dallas Fed’s Texas Retail survey proffers reads on current revenue and selling prices. The difference between these two is depicted in today’s right chart in burnt orange (Go Horns!). Post-pandemic, this gauge has trended with monthly changes in U.S. real consumer spending. For June and July, though, the Dallas Fed data dropped off relative to previous months. You see where we’re going with this.
The Rising’s timely release coincided with the early phase of the post-9/11 recovery. After COVID, stagflation risks and supply constraints look to cap auto sales. Recession risks also are likely underpriced, breeding overvaluation risk in the right tail of the asset spectrum.