With apologies to those who recognize the reference, sometimes only one thematical shoe fits. In 1972, George Carlin released his fourth stand-up album with one track — “Seven Words You Can Never Say on Television.” Such was the stir, he was arrested for disturbing the peace when performing the routine at Milwaukee’s Summerfest that year. Though no tween would flinch today, at the time, letting any of these ‘dirty seven’ slip elicited BLEEP censoring on the small screen. While the list was not “official,” a radio broadcast featuring all seven culminated in a 5-4 Supreme Court decision in 1978. Per the ruling, FCC v. Pacifica Foundation found the FCC’s declaratory ruling did not violate the First or Fifth Amendments. The decision constricted the extent to which the U.S. federal government could regulate speech on broadcast radio and television.
It was once the case on the Street that “inversion” was such a potty word, it conjured a bona fide obscenity — “recession.” In years past, QI’s Dr. Gates tested this hypothesis in the wild, i.e., on trading floors, and documented spontaneous nervous-tick-type reactions. But that was then. Make mention of the “yield curve inversion” today and you get a “meh,” if anything, if not a glassy-eyed stare and a yawn. Recession risk has nearly faded from sight, from a 65% probability in June 2023 to 35% today.
For anyone still paying attention, yesterday’s March Conference Board Consumer Confidence warned the yield curve inversion that cried wolf isn’t finished howling. Veteran Feather readers are familiar with QI’s Labor Curve, the spread between negative Current and Future Employment responses in Jobs Hard to Get and Fewer Jobs. As night once followed day, Labor Curve inversions (orange line) historically followed yield curve inversions and defined recessions. In the post-pandemic environment, this relationship flipped – the Labor Curve inverted before the yield curve (blue line). Neither has risen above the zero line yet, punctuated by the unemployment rate remaining south of 4%. Given the Higher for Longer (yes, Virginia, the Federal Reserve’s ongoing Quantitative Tightening does represent future lag effects that will come home to roost) backdrop, we can’t rule out the Labor Curve un-inverting prior to its yield curve counterpart in this cycle.
Keeping with the inversion theme for Tuesday’s data dump. February’s Durable Goods report flashed a Core Capex Curve, the spread between leading New Orders and coincident Shipments, that’s been upside down for 16 straight months (purple line). Tack this on to the unequivocal message via the Dallas Fed that it’s premature to declare an end to the industrial recession. This curve inversion depicts the evolution of the core capex backlog, a progression of its monthly changes. The persistence of the losing streak points to persistent demand headwinds which manifest in the loss of hours and shrinking paychecks.
In the same breath, household Income Expectations have cooled from last July’s recent peak (yellow line). Granted the numbers have stayed above water (at 2.7 in March) given they capture economywide workers, not just those limited to the factory complex. Nonetheless, the cooling in Income Expectations has occurred alongside the cyclical softness in core capex. Disinflation is the top takeaway.
Geographic inversions have surfaced as well. Take the Labor Flow Spread from the Land of Lincoln. The comparison of year-over-year (YoY) flows in nonfarm payrolls and unemployment are favoring the latter over the former this January and February (lilac line). Per the Conference Board’s Illinois data, the Present Situation index has dropped abruptly since its December 2023 peak (teal line). Clearly, Illinoisans are anxious given the 47.4-point drop in the three months ended March was the biggest absolute pre-pandemic decline on record, not a development we take lightly from what remains the country’s fifth largest economy. It can’t help that the bloodbath in the retail sector has been particularly acute in the state as it’s suffered tax flight. Red-hot Ulta, the national phenom, just announced it was closing its downtown Naperville store by the end of this month.
Moving east, regional Fed reports on the labor-intensive services sector yielded an interest fusion. Both the Philly Fed non-manufacturing report and the Richmond Fed service survey include future gauges of new orders/demand. Averaging these two metrics together generated a Future Services Demand index (light blue line). Beginning in August 2022, this index fell in and out of inversion. Since March 2023’s regional banking turmoil, the inversion has run unchecked speaking to activity persistently running below normal.
Combining unemployment rates across the eight states (plus D.C.) in both Fed Districts (red line), we note last May’s 3.2% trough. Because Philly Backlogs continue to contract, the culling of contract workers has yet to abate — full-time employment growth has slowed sharply amidst a stalling out in hours worked. We need almost all the fingers on one hand to count the ways we see slowing afoot in the Richmond District. Current Capital Investment remains in decline, Equipment & Software Spending stalled suddenly, and service Expenditures posted the worst pre-pandemic showing on record. A sharp slowing in Expected Wages corroborates easing labor market conditions. In QI’s never-ending goal to place a face with a data point, Gannett just announced it’s closing its plant in Cherry Hill, New Jersey, part of the Philadelphia Fed’s District, which will leave 139 out of work who’ve every right to spit out any, many, or all of what were once seven forbidden words.