On-air chemistry is either there or it’s not. In 1999’s The Thomas Crown Affair, Rene Russo and Pierce Brosnan perfect the art. But it takes two to Tango, which the two did with sizzling precision. Alas, GoldenEye was as good as it would get for Brosnan as James Bond. The 1995 hit was the only of the actor’s four installments as 007 to crack the Top 10 Bond movie list. As borderline extremists at QI, we can recite by memory the remainder of the franchise’s best films, which are uncoincidentally portrayed by the first and eighth (and most recent) actors to say, “Bond, James Bond.” What Sean Connery achieved with panache, Daniel Craig matched with authenticity. The audience’s reverence was earned. As for the box office, that titleholder is 2012’s Skyfall, Craig’s third of five Bond films, which raked in $1.2 billion ($1.5 billion today) and earned the series its first Oscars since 1964, the year the best Bond film of all time was released. The psychotic and egocentric villain, his henchman Oddjob with that hat, the Bond girl with a name that’s as iconic as the movie and the line: “A martini. Shaken, not stirred.”
Dressed in pale gold for a Hedgeye event in Connecticut last Friday and asked what song I’d like played to welcome me to the stage, Goldfinger flew out of my mouth as if Pavlov himself had trained me. Settled in for the fireside chat, the first question I suggested be asked 24 hours earlier no longer rang sincerely: “How does it feel to be out on that ledge calling for recession to have started last October?”
It’s one thing to throw out acronyms such as the QCEW and BED and refer to 192,000 job losses in last year’s third quarter with hard data in hand that replaced that produced by the Establishment survey. Any stock jock worth their salt will tell you revisions, even ones that erase the illusion of an economy in expansion, don’t move the needle for markets. If revisions mattered to markets or the Federal Reserve, for that matter, the alarm would have long since sounded. In the 14 months ended February 2024, we saw an undisturbed stretch of negative revisions to private nonfarm payrolls (recall that last July’s positive revisions were entirely attributable to government jobs).
What can’t be ignored, however, are double misses to headline data. Rather than the 240,000 jobs forecasted to be created, there were 175,000. And instead of remaining unchanged at 3.8% as expected, the unemployment rate rose to 3.9%. The kicker arrived 90 minutes later, with news that the U.S. service sector had contracted for the first time in 15 months.
The increase in the unemployment rate re-trigged the McKelvey Rule (upper left chart), which has a flawless track record. Every time we’ve seen a 0.3 percentage point increase in the 3-month moving average of the unemployment rate over its low point over the prior 12 months, the U.S. economy has been in recession. The revisions through 2023’s third quarter suggest that this perfect predictor did not suddenly fail last October.
The opposite is, in fact, likely. In the 1970 and 1990 recessions, the McKelvey Rule wasn’t triggered until the economy was one month into recession; in the ugly and drawn-out contractions that began in November 1973 and July 1981, the McKelvey Rule was not triggered until the third month. In other words, depending on how revisions to the other six metrics the National Bureau of Economic Research tracks to date recessions, past precedent dictates the recession might have begun before last October.
Looking ahead, the dueling contractions in employment indexes within the S&P Global and ISM services surveys suggest 80% of U.S. workers are on alert (red and yellow lines, respectively). The endless parade of layoffs has yet to end. Aggregating the two indexes and normalizing them with a z-score places the level at -0.75 (light blue bars). For context, the first month this z-score was this negative headed into the Great Recession was December 2007, the first month of contraction.
Not illustrated, through May 4, MacroEdge tallied 21,092 layoff announcements. Given April’s high point of nearly 115,000 layoffs for the month, it’s clear the pace of headcount reduction is accelerating. The same can be said for the bankruptcy cycle. Fresh data from Epiq revealed April Commercial Chapter 11 filings rose 40% year-over-year (YoY). Broadening out to all bankruptcies including households, the count rose 28% YoY). Expect a continued increase in those working part-time for economic reasons and permanent job losses. To draw a parallel to December 2007, the ranks of the former were 4.6 million back then compared to 4.5 million last month (teal line). As for those out of work for six months or more, they were 2.0 million then compared to 1.8 million today (orange line). Of course, there are always those revisions to continue rewriting history.
What’s left of those who subscribe to consumers driving spending and thereby making inflation stickier than it would otherwise be, in addition to the drag of job losses on income generation, we foresee an inventory correction to pose a bigger drag on goods deflation. The inverted z-score of the combination of the Inventory Sentiment Index of the ISM Manufacturing and Services surveys of 0.6 flags a continued fall in prices (lime bars, purple line). This economy is set to be shaken, not stirred.