The dreaded “double dipping” garnered public lexicon infamy in Seinfeld’s 59th episode. The title of “The Implant” gave nothing away as notoriety derived from the secondary plotline. In short, George accompanied his girlfriend, Betsy, to Detroit for her aunt’s wake, hoping to accelerate their relationship by being as supportive as she was grief-stricken. Ever the renowned cheapskate, only he would have attempted to get a copy of the aunt’s death certificate to score a 50% bereavement discount on his airfare. Mission Tacky takes a turn for the worse at the funeral reception when George gets into a heated argument at the funeral reception with Betsy’s brother, Timmy, over the social acceptability of double-dipping a chip. One devolution into a disruptive fistfight later, a distraught Betsy broke up with him. Stereotypically, George was unable to procure a copy of the desired death certificate. Per the airline agent, the picture of him next to the casket did not constitute proof of death.
Double-dipping is no modern construct in the dismal science. Periods of economic decline, followed by a spurt of growth, capped off with a resumed contraction are commonplace in annals of economic history. Some cycles are veritably peppered with double dips. Yesterday’s disappointing drop in U.S. home builder sentiment is the latest in a string for the current cycle. In theory, the Federal Reserve’s Higher for Longer mission not-yet-accomplished should take a cumulative toll on interest rate-sensitive sectors. The “Lower for Longer” we once loved as no other should have flipped to applying to economic risk.
Instead, we saw a much-lauded bounce in the National Association of Homebuilders (NAHB) monthly Housing Market Index…until this month. All three components — Current Sales, Future Sales, and Buyer Traffic – posted declines of at least 10 points over the last two months (blue, olive, and red lines, respectively). The rarity of such synchronicity places this event in the far-right-tail 2nd percentile.
NAHB Chair Alicia Huey says high rates are to blame, which “significantly eroded buyer purchasing power.” Robert Dietz, the association’s chief economist added that “a growing number of buyers are electing to defer a home purchase until long-term rates move lower.” According to Freddie Mac, that ain’t happening. Its weekly read on rates has been north of 7% for five straight weeks (inverted yellow line). The upshot: A margin squeeze. Some 32% of builders reduced prices this month, up from August’s 25% and the highest reading thus far in 2023.
“Discounting” is the word that will also apply to the broader services economy, one that’s also on the verge of double dipping. Of late, the New York Fed’s Empire State manufacturing survey has been so volatile as to give investors vertigo. On Monday morning, its sister Services survey revealed that after rising from a local low of -21.4 in January to 0.6 in August, the current business activity index relapsed to -3.0 in September (purple line). To be sure, when compared to a long-run average of 3.5, the September level translates to a -0.4 z-score. In a vacuum, there would be nothing else to worry about.
In the case of New York, the highest intensity services state, the emerging double dip in business activity is colliding with a rising tide in joblessness. In the eight months ended September, initial jobless claims have risen on a year-over-year (YoY) basis (green line). Forensic cycle analysis back to the mid-1970s reveals that by the time you arrived at month eight sequentially, the U.S. economy was either in recession or within spitting distance of one starting 83% of the time. For all of you still lingering in the soft-landing camp, the one false signal landed in August 1995. Echoing initial claims, New York State continuing claims have risen 20% or more YoY from April to July (the latest month available). Further deterioration will likely manifest once August and September data are available.
Double dips in services and homebuilding with rising unemployment suggest the forecasting community’s 60% recession probability is overly sanguine.
Let’s add to the narrative the specificity that New York is the U.S. financial center. According to the Bureau of Economic Analysis, in state gross domestic product (GDP) terms, it accounted for 21.3% of total activity in the country’s finance and insurance sector, more than twice that of California’s 9.2%, and three times’ Texas’s 7.1%. For those keeping score, at 5.0% and 4.9%, Ohio and Illinois, respectively round out the Top 5. To that end, banks that lend into housing and autos are having a rethink. On Friday, Bank of Montreal (BMO) announced the following: “Recently, as part of an evaluation of our consumer lending businesses, we made a strategic decision to exit the retail auto finance business.
As a result, we are terminating the “Dealer Agreement” between us effective September 15, 2023.” At least there’s dealmaking? Merger and acquisition (M&A) dollar volume peaked in 2022’s fourth quarter (light blue bars); the seven straight quarterly declines since punctuate the third round of layoffs starting at the investment banks that set the Street’s pace (lilac line).
Ahead of tomorrow’s FOMC, the New York Fed Services’ Current and Future Selling Prices validate Fed funds futures pricing a near-perfect pause (yellow and lime green lines). Price normalization in the country’s most intensive service sector state points to further cooling in the supercore (olive line) that reinforces investors’ hopes that the Fed is done for this tightening cycle.