What do Homer Simpson and Shrek have in common? Both have uttered the fun phrase, “working hard or hardly working” in their animated forms on the small and big screen, respectively. Of course the expression predates animated stars bandying it about. From the Lone Star State circa 1937, Bill Beaumont’s column in the Beaumont Journal penned: “PET PEEVE: I wish there was a cure for the bird who always greets you with “How you doin’, working hard or hardly working?” People don’t realize how stupid and asinine it really sounds.” From the Bluegrass State, an advertisement read: “Mr. Consumer, I don’t know whether you are working hard or hardly working, neither do I know what condition your stomach is in, but I do know how to protect you from old Hy Price.”

In recent years’ industrial supply chain, “high prices” have plagued too many purchasing agents’ budgeting to count. What started with the trade war culminated with post-pandemic undersupply troughing in July 2021, when the Institute for Supply Management’s (ISM) manufacturing Customers’ Inventories index fell to a record low 25.0. Four months later, this inventory gauge retested that low, dropping back to 25.1 (dark blue line). This unprecedentedly gigantic pig moving through the python created upstream price inflation that hadn’t been suffered since the mid-1970s. Core Intermediate Goods PPI inflation crested at a 24.3% year-over-year rate (YoY) in November 2021 (red line). While it’s subsequently been downhill, it took 16 long months for core intermediate goods PPI inflation to stop rising; it finally printed unchanged this March. Downstream, at the Core Goods CPI level, pricing pressures began to subside after February 2022, from a 12.4% YoY rate and cascaded to a 1.6% YoY two months ago (yellow line).

Why bother with such trifles given the Federal Reserve has herded us all into the “supercore” service inflation corner? With deference to Chair Jerome Powell’s affinity for macroeconomic indicator innovation, sellers’ collective mindset will reset when they confront oversupply. QI’s good friend Peter Boockvar put ISM Customers’ Inventories into context: “[It] got above 50 for the first time since 2016 which implies inventories won’t be rebuilding anytime soon.” Sellers destock into falling markets.

When inventory cycles turn from virtuous to vicious, goods producers’ profit margins are on the frontlines. One way to measure the inventory cycle pivot is an ISM spread created to capture this industrial complex inflection point. In the last two months, those reporting to ISM that their current inventories were ‘higher’ came in below that of respondents who said customers’ inventories were ‘too high.’ April’s -4.8-point inversion (light blue line) has but two other rivals from business cycle history – and both start in periods described by the ‘r’-word. This ‘crossing of the streams’ signals a deepening in the industrial recession. Production shifts are pared back first followed by Factory Worker Hours. This varsity-leading business cycle indicator plateaued at 41.5 in February/March 2022; we foresee further compression from this March’s 40.7 in Friday’s employment report.

In honor of the season of cross-checking in the NHL playoffs, we took in the latest from our favorite clairvoyants. The National Association of Credit Management’s (NACM) manufacturing index for Amount of Credit Extended double-dipped in April after March’s bank failures catalyzed the credit crunch. The NACM’s Rejections of Credit Applications collapsed. Both these gauges (orange and lime green lines) are scaled to our favorite normalizer, the z-score, and both are close to or through the -1 mark. The pandemic aside, this double-barreled tightening has only been seen in the Great Recession. An inventory correction and credit crunch flag as a head fake the recent rebound in industrial production (purple line), one of four coincident indicators of the business cycle.

Declining ISM manufacturing Backlogs are reflective of this acute tightening in conditions – they’ve contracted in the seven months since October. Moreover, a re-weakening these last two months suggests a new chapter is opening in the industrial recession. As a rule, backlogs lead employment. While the ISM’s Employment Index has yet to capitulate – it popped by 3.3 points to 50.2 last month, a hair above that line separating expansion from contraction – we suspect it too is on borrowed time. You must track back to backlogs’ 2021 peak of 70.6 which was not met by a hiring spree. Instead, factory operators got shellacked by wage inflation. As measured by the first-quarter employment cost index, labor costs have paced at nearly 5% YoY, twice the average of the prior 20 years.

As Bloomberg reported yesterday, first-quarter earnings calls have seen concerns about wage pressures replaced by references to cost cuts. To that end, continuing jobless claims in manufacturing rose at YoY rates of 0.8% and 1.5% in January and February, respectively. They went on to jump 13.3% above year-ago levels in March. None other than General Motors delivered the news yesterday that there is more to come. As reported by the Detroit News, several hundred contract engineers in GM’s Global Technical Center would lose their jobs as part of the company’s $2 billion by yearend 2024 cost-cutting efforts. This follows last week’s news that Stellantis has asked more than 33,500 hourly and salaried workers to take voluntary buyouts. But it isn’t the biggest players. As noted on DailyJobCuts.com, power tool maker Makita plans to lay off 213 workers nationwide. Unfortunately, ‘hardly working’ sounds like it’s winning out.

“Sweet April showers,

Do spring May flowers.

Forgotten month past,

Do now at the last.”

Thomas Tusser, 1524-1580

Five Hundred Points of Good Husbandry

As any proper meteorologist can attest, April brings huge weather swings to England as the jet stream lifts northward at the advent of spring. Closer to home, Green Bay, Wisconsin historically averages more than eight inches of snow in March; that falls to three inches in April. As the British poet assured way back when, the month of May delivers with allium, crocus, daffodils, hyacinths, snowdrops, and tulips bursting through the earth from the bulbs that have awaited sunshine and warmth. Conversely, Tusser may have been referencing the Plague. In medieval England, the fear was the killer virus could be transferred via bath water. To best protect, welcome layer upon layer of dirt and grime to build up on your skin in the cold months after which point April showers could safely cleanse the body. Of course, Spring is also an ideal metaphor. Survive the harshness of life’s winter and be rewarded with the rebirth and renewal promised by a new season.

In the case of the markets, it’s looking like April’s bank failure showers will be followed by…another bank failure. With any luck, risky assets will continue to fete the failures. While the Nasdaq was unchanged on the month, the S&P 500 closed up 1.5% and the Dow’s neat 2.5% gain marked the most buoyant monthly gain since January. Bank failures have also left the Federal Reserve’s plans to continue down its tightening pathway intact. Even as the Federal Deposit Insurance Corporation “rushed to fix the crisis” — otherwise known as First Republic, the nation’s 14^th largest bank – the probability of another 25-basis-point rate hike remained comfortably north of 80%.

And why not? As a Wall Street Journal headline lamented, “The Building Boom is Prolonging Market Pain.” Clearly, the Fed’s policies have yet to govern growth. Per the WSJ, “The longer it takes for construction activity and employment to decline, the longer it will be before the central bank can cut rates.” The article explains that government initiatives to induce electric vehicle and semiconductor manufacturing are supporting non-residential construction. Moreover, owners with ultra-low mortgage rates are keeping existing home supply off the market while apartment construction is running at the highest rate since the mid-1980s.

Conspicuously absent, however, was any mention of the Fed’s post-pandemic overreaction spurring speculation across the residential real estate spectrum. The supply chain disruption also left a sizeable backlog of homes to be completed. The upshot, per Zelman & Associates (ZA): “Total speculative new home inventory either under construction or completed fell 3% sequentially to 324,000. However, this is still up 7% year over year and compares to a monthly average of 267,000 in 2018-19.”

Color us skeptical on the “If you build it, they will come” strategy. We’ve run out of fingers and toes trying to keep count of the number of recessionary signposts. At -7.4, future inventories across U.S. manufacturing regions have taken out their post-pandemic low (blue line). That said, a simple average of New Orders indexes across those same regions popped up to 45.3 from March’s 41.1 (yellow line). Given the stronger signal in future inventories, we would fade the pop in this ‘whisper’ number if it’s echoed in this morning’s ISM New Orders index (red line). The weekend’s release of China’s official manufacturing PMI compounded our conviction. Both the headline and New Orders index slipped back into the red for the first time since December when Chinese officials snapped the economy out of Covid restrictions.

The deepening industrial recession was also apparent in Indeed’s first quarter job postings data, which revealed demand for manufacturing workers fell 18.4%. We see zero coincidence in Indeed’s overall postings index slumping by a fifth from its high to its lowest level since May 2021 (pink line), before the worst of inflation was combusted by that third federal stimulus check directly deposited into U.S. households’ checking accounts the prior month. As sure as falling labor demand drags on aggregate income, the fiscal hangover will also be gravitational across lagged inflation gauges (upper right chart).

Tellingly, Indeed’s hardest hit industries were white-collar professions. Friday’s final April consumer sentiment read via the University of Michigan told a similar tale with the top tercile of income earners’ expectations that the unemployment rate will rise in the coming year at a cycle high 54% (purple line). Not only is this up 12 whopping percentage points, QI’s Dr. Gates notes, “Since 1979 inception, this definitive metric has an 85% hit rate for recession…in the current month.” This depth of weakness has dependably flagged deterioration in the unofficial unemployment rate. For workers in the middle and bottom of the income stack, this will be a rude awakening as their perceptions of the job market are not as dour (orange and lime green lines).

As for this spring’s booming construction sector, Indeed’s postings in that sector fell 6% in the first quarter. We dare say, supply will continue to defy the narrative and creep into this market. As ZA highlighted, first-quarter single-family rental occupancy hit a nine-year low “as shadow supply from homes under renovation and built-for-rent has led to a higher share of vacant homes not yet listed for lease.” The term “shadow” will rise in prominence as financing 13.8 million vacant homes becomes increasingly challenged (bottom right chart).

There is fame. And there is infamy. Semant-addicts relish the distinction. The Latin fama translates to “celebrated;” the connotation is positive. And then there is infamis, or “of ill fame,” a legal tern referring to one who’s lost rights as a citizen after being convicted of a crime. These days, excessive energies are expended to shift the Federal Reserve’s standing to infamy. QI won’t hide its complicity. The famous Kansas City Fed’s Jackson Hole Symposium is held in the highest regard. In a recent Weekly Quill, we technically besmirched the confab’s pristine status by reminding the public about what was first highlighted when Fed Up was published in 2017 – The Bernanke Doctrine. The August 2007 behind-closed-doors agreement amongst a small group of the former Fed chair’s closest confidantes laid the groundwork for predicating that Large Scale Asset Purchases be preceded by taking the Fed funds rate to the zero bound. The legality of the meeting was questionable at best, hence the Doctrine’s infamy in an economy to which Quantitative Easing has laid waste.

Of course, this isn’t the first time the KC Fed has been designated as infamous. Alongside the St. Louis Fed, it was infamously conceived. That the 10^th and 8^th District same-state counterparts coexist within 250 miles of each other stands as testament to how close legislators were to rejecting the Federal Reserve Act of 1913. Among those in the know today, the Fed is as controversial as it’s ever been. Even as it appears another large regional bank will be placed into receivership after today’s market close, monetary policymakers are poised to raise the overnight rate by another 25 basis points this coming Wednesday. Credit crunch or not, tighten on they will.

If anything, Thursday morning’s first look-see at 2023’s first quarter GDP emboldened Jerome Powell and his hawkish disciples. The quarter-on-quarter increase in personal consumption expenditures net of food and energy didn’t pop up from the fourth quarter’s 4.4% to a 4.7% rate as expected, it spiked a full half-percentage-point to 4.9%. You may be asking: Why exactly did markets celebrate the news of further Fed tightening?

This is where things get complicated. Let’s go back to the Kansas City Fed, the territory of which stretches west. Last week, we explained that the state of Colorado is high in more ways than the metaphorical; its string back to last October of rising year-over-year (YoY) jobless claims bests (technically, worsts) any other state in the nation. The state of Kansas, on the other hand, has been practically immune…until the last few weeks. In the week ended April 8^th, claims were down 15.7% YoY (a good thing) compared to the national average of up 5.7% YoY (a bad thing). Last week, the Kansas trend flipped positive in the ugliest way, with claims up 40.6% YoY just to be followed in the latest week reported ended April 22^nd, at up 59.5%, the fourth worst in the country.

This dramatic turn left us as one of the few waiting with bated breath for the release of the Kansas City Fed Manufacturing Survey at 11 am ET yesterday. We concede this is not an ‘A’ team data point. Nonetheless, we were shocked when the April print hit. All five ISM-equivalent metrics – New Orders, Production, Employment, Supplier Delivery Times, and Inventories – had flipped into the red from being bigly positive a year ago (upper left chart).

In the spirit of ‘plus ça change,’ for all the bluster about the turnaround in the housing market, it looks like the mortgage rate relief will prove to be finite. March Pending Home Sales crumbled, sinking at a monthly rate of -5.2% compared to expectations of 0.8%, which would have matched February’s pace (blue line). As such, the improvement YoY was arrested – it’s now at -23.3% compared to -21.1% in February. While we may well see upward revisions to prior years’ residential real estate contribution to GDP (more on that in coming weeks), the initial first quarter print marked the eighth straight quarter this input was a drag on growth (yellow line).Backing out to the bigger GDP picture, we wax philosophically in noting that as night follows day, supply follows demand. In economics, demand in its purest form is measured by the difference between output (i.e., GDP) and supply (i.e., inventories). The National Income and Product Accounts allow for this calculation to be applied to the nonfarm sector, thus creating nonfarm demand (orange line). This, in turn, reliably guides nonfarm payrolls, the supply of labor that generates output (purple line). As QI’s Dr. Gates diplomatically foresees, “Sustained depressed demand portends poorly for job growth as 2023 unfolds. In past cycles, when nonfarm demand has run below nonfarm employment for an extended period, the latter has converged to the former.”

Finally, note that growth overall, as depicted by the dynamism in Real Private Demand, has come to a screeching halt (bottom right chart). As the media blasted when the data hit, business investment is notably contracting. We would add that S&P Global did not bake back into its second-quarter forecast the reversal of the first quarter’s inventory deficit. That doesn’t happen unless stall speed is what’s expected. As for the “strong” consumer that reflected the temporary spate of car sales, we fully expect this cycle’s trend to go down in infamous flames a la subprime mortgage circa 2006.

According to Johns Hopkins Medicine, the body’s main vital signs routinely monitored include body temperature, heart rate, respiratory rate, and blood pressure. An easy fifth is oxygen saturation. The most precise way to measure the amount of oxygen circulating in your blood is invasive via an arterial blood gas analysis. A given trip to the emergency room, however, lands a finger in a loose vise, a quick triage to gauge peripheral oxygen saturation (Sp0₂) with a pulse oximeter, which can also be purchased for home use. These nifty gadgets, which can be had for about $15, are also useful for parents who stress over their kids’ oxygen levels when they come down with something that sounds like it’s a notch or two worse than the common cold. Given the most recent winter replete with RSV, or Respiratory Syncytial Virus Infection, which presents in children younger than 1 year of age in the United States as pneumonia, we’d have to say the small investment pays for itself by way of a peace of mind dividend.

Measuring an economy’s vital signs is an even more complex process. The composition of gross domestic product (GDP) canbe used as a benchmark for developed economies with substantial domestic demand footprints, such as the U.S.’s 68% share. As much as consumption dominates, it’s arguably shortsighted to ignore business investment. In the pre-pandemic half-century, the year-over-year (YoY) trend in gross private domestic investment (fixed investment plus inventories) had a higher correlation (.80) to YoY changes in the unemployment rate vis-à-vis consumer spending (.58). Simply put, capex drives the economic expansion which, in turn, drives the job market.

On Wednesday, we referenced backlogs of the soft-data survey variety. Today, we use this future demand indicator in its hardest form — changes in the backlog for nondefense capital goods ex-aircraft, the difference between the level of core capex new orders and its shipments counterpart (teal line). The former leads the latter (which is a direct input into business investment in GDP) and has been negative in five of the last six months. Past persistence in this metric has run in tandem with U.S. recessions in 2001 and 2007-09 as well as the 2012 Euro Area recession and the global 2015-16 industrial recession. Less future work explains why this gauge also guides the ‘it-girl’ of leading indicators, ISM manufacturing new orders (olive line).

Yesterday’s Advance Goods trade data opened a lens on global capex. Imports are flashing red. The six-month annualized rate fell to -9.1% in March from 5.6% in February (fuchsia line). The -15-point swing equilibrated to a z-score of about -2 and signals downside risk to already negative core capex orders (lime green line).

Wednesday’s data docket also refreshed the inventory backdrop. To set the scene, March’s ISM manufacturing survey depicted a relapse to oversupply in the upstream supply chain. ‘Too high’ customers’ inventories nearly pierced the 20% level for a second time this cycle, which touches the recession threshold (blue line). Hard data from the combined manufacturing and wholesale industries corroborate that supply has been in an outright decline, which defines an inventory correction, in each of 2023’s first three months (red line). Digging deeper, manufacturing/wholesale durable goods inventories posted an outsized $4.7 billion drop in March, while their nondurable goods counterpart declined for a fourth straight month; both are recessionary reads. This said, retail inventories have yet to flip to the red (green line), which flags further downside risk to the supply side when households hunker down.

Whether we’ve seen a full recognition on households’ parts is a matter of semantics given what we’re seeing in packaging. As highlighted a few months ago in a Weekly Quill simply titled, “The Indicator,” former Federal Reserve Chair Alan Greenspan’s go-to leading indicator was corrugated, a.k.a. boxes. On Tuesday, Packaging Corporation of America saw its stock price fall out of bed after announcing total corrugated paperboard shipments had fallen 13% YoY thanks to falling demand. QI’s friends at FreightWaves followed up with a doozie of a chart showing collapsing box shipments had taken out their 2009 lows.

The level of deterioration is evident in layoffs per day mined from dailyjobcuts.com running at eight-times the pace in 2022’s first four months. Closings per day, which notably exclude biggies like Bed, Bath & Beyond, are twice last year’s pace over the same period. As the website’s founder said Monday, “Tech inflated layoffs because they can do 5,000-20,000 at a time. Most companies don’t have 5,000 extra employees kicking around. It’s being portrayed that layoffs are “down” when in fact they’re just as bad and still going hot, which is surprising after six-plus months.” Initial jobless claims will keep rising.

Given the renewed scrutiny of bank loan books, on-edge bankers will be attuned to these fundamental signals and fade reassurances that the “U.S. consumer is strong.” The May 9^th release of the Federal Reserve’s Senior Loan Officer Opinion Survey will be shunned by the few remaining “soft landing” holdouts. Critically, Fed officials will have the results of the survey in hand when they meet next Tuesday and Wednesday. They know that a further clampdown in lending standards will only depress already-impaired investment. If, despite the nation’s vitals worsening, Powell & Co. press forward with a rate hike, we’ll know the move was a (likelier than not, failed) attempt at hammering one more nail into the coffin of the Fed Put.