Coined in 1992 by political strategist James Carville, “It’s the economy, stupid,” has become part of the fabric of the American vernacular. The fallout from the 1990-91 recession left many Americans out of work and in debt which became highly influential factors in the 1992 U.S. Presidential election. Echoing the era, most polled Americans today share the sentiment with their 1992 counterparts with planned holiday spending down over 2021, a rarity in Gallup polling. Over time, Carville’s phrase has become a snowclone, repeated far outside the confines of politics, adapted at will by commentators. All you need is the word “It’s” at the outset. “It’s the deficit, stupid!” “It’s the math, stupid!” “It’s the voters, stupid!” “It’s the defense, stupid!” Or in Texas where temperatures threaten to plumb into single digits in coming days: “It’s the weather, stupid!”10
Our snowclone to add to the mix: “It’s December, stupid!” Consumer confidence surprisingly rose to 108.3 in December. That compared to market expectations for 101.0, from a revised 101.4 in November (previously reported at 100.2). This year marked one of the largest beats for any December since Bloomberg began tallying consensus figures in 1997. That said, we know holiday cheer and time away from the office lend a consistent upward bias to the month. In 31 of the last 45 Decembers since 1978, or 69% of the time, the month has registered a month-over-month (MoM) gain. In the 20 years through 2022, there have been 15 gains for a 75% hit rate. Such forensics sow the seeds of doubt that the “Santa Claus” rally in consumer confidence is real. Investors should view the parallel risk-on rally in stocks with skepticism.
Consumers are literally operating on borrowed time. Credit card spending is on track to increase by $110 billion in 2022. Per WalletHub, this level is pacing to be a record annual increase. Not only has inflation taken its toll on household purchasing power, but many consumers have also been challenged to dial back their 2021 spending habits that had been turbocharged by government transfer payments.
Without a visibly deteriorating labor picture (read: higher official unemployment rate), U.S. households have levered up to keep spending. The six-month annualized trend for credit cards surged to above 20% in July (light blue line). More recently, the monthly pace has slowed, but double-digit expansion on this basis remains in place. The persistence is unprecedented for this data series gleaned from the Fed’s H.8 release of assets and liabilities of commercial banks. Even as the “cha-ching-ing” of credit card usage boosted retail activity, income expectations, a key forward determinant of consumer spending, cooled in 2022 (pink line). These diverging trends suggest that the expansion represents a demand pull forward, which works if spenders are employed. Increased unemployment will have the opposite effect, compromising the consumption that is 70% of U.S. economic output.
Several job indicators are flagging a continued rise in the unemployment rate. Fewer Jobs, a measure of future employment expectations (red line), has trended higher since bottoming in April 2021. Jobs Hard to Get, which proxies the unemployment rate (blue line), has followed since its March 2022 trough. Two months later, the insured unemployment rate, a measure of the unemployed collecting jobless benefits (green line), reached a post-pandemic low point and has since risen by 28%. And finally, small businesses’ concerns about sales (yellow line) formed a double bottom in March and the August-to-October timeframes.
Households are wise to the implications of job losses on the broader economy. The Economy Curve measures the difference between bad current business conditions and worse future business conditions. This gauge has bounced off its most inverted point reached in June 2022 (purple line). Over multiple cycles, the Economy Curve has lagged U.S. Treasury curve inversions. In the current episode, however, the Economy Curve is in the lead, un-inverting before the 2-year/10-year curve (olive line).
“It’s the Economy Curve, stupid!” Dialing down the frequency from monthly to quarterly, past steepening in the Economy Curve following inversions has ratified U.S. recession when sequential declines in gross domestic product (GDP, light blue bars) and stock bear markets have emerged (orange line). With the Economy Curve un-inverting marginally in the fourth quarter and the stock market down 20% on the year, the only thing missing is the GDP decline to complete the picture.
On that note, our favorite GDP trackers at S&P Global maintained their 0.7% fourth-quarter call after a disappointing existing home sales report. That would compare to 2022’s first three quarters’ prints of -1.6%, -0.6% and 2.9%, respectively. With December data yet to be reported, we can bring you up to date with the latest via DailyJobCuts.com. With 10 days left in the month, there have been 203 closings, 48% more than 2021’s December tally of 137. The risk of a full year of negative output for 2022 remains high.
No doubt, the continued deterioration in economic conditions supports a steepening narrative. At least one among us seems to think that rule is meant to be broken. You may have noticed that despite the season, one extremely stubborn Federal Reserve Chair Jerome Powell, has all but promised to tighten into the teeth of recession. Pushing pause, which tends to catalyze a spring-like steepening, isn’t among Powell’s New Year’s resolutions, even as we warm up our vocal cords to join family and friends in signing “Auld Lang Syne.”