Economic Updates for August 2023

The GDP Nowcast from Atlanta FED has been confounding many investment strategists this month. It is reporting a whopping 5.8% in nominal GDP growth for Q3, 2023. While you may question the magnitude, it certainly begs the question how we could possibly be in a recession with such positive growth.

In sharp contrast to the GDP Nowcast above, the Conference Board's leading economic indicator (LEI) is giving a recession signal. The indicator has been signaling a recession for almost a year now!

The Dollar has bounced back from its mid-July lows very nicely. The tail wind certainly has been the increasing 10-year yield. The story on Fitch downgrade seems to only have helped the dollar in the short run.

Since July, energy prices have been steadily climbing. Recently, within a week we are noticing some resistance and the prices are rolling over.

Gold and Bitcoin are continuing their pause as the dollar has climbed.

Same comment as above in Gold.

The yearly inflation number seems to be at a low point after the large monthly inflation prints from last summer have rolled off. In the coming months, the competition will be with very low monthly inflation numbers from last fall and hence the yearly inflation might appear to bounce up. Barring this nuance, we are in a good territory with respect to inflation - 0.2% for July.

PPI is projected to be 0.3% in July. The release of this number created a ripple in the financial markets however.

This is the headline inflation number that everyone talks about. Currently, for August 2023 we are at 3.2%. We are certainly in the right neighborhood. In the coming months, we hope the inflation remains contained. Historically, inflation is known to bounce back a few times before it finally subsides.

CPI Components Last Month

CPI Components This Month
All components of inflation are seen moderating. As mentioned earlier, energy's contribution to inflation has been consistently negative in the last few months in a row now! (Please note that the y-axis in both the graphs have different scales).

This survey data shows that inflation one year from now is expected to be 3.3%. This has not changed much in the last month. Perhaps more of the survey participants remain convinced that the inflation will abate sharply.

Consumer sentiment has remained close to last month's number which surprised us on the upside. It jumped to 72.6 last month largely attributable to continued slowdown of inflation and the strong labor markets. This month the reading is at 71.2. As long as the consumer is strong, it is hard to make a case we are in recession.

The AAII sentiment has been moderating as the S&P 500 has been rolling over in the past few weeks.

We hope this is just a summer swoon as many investors are on vacation enjoying their summer.

This month has witnessed a bounce back in Manufacturing PMI. However, it still is below 50 indicating slowing contraction.

In contrast to the Manufacturing PMI, Services PMI reading has been steadily above 50 over the last few months but slowing the expansion in the last few months.

Industrial Production refuses to show the optimism seen in the services PMI numbers. It is still close to 0.

Retail Sales has bobbed up into the positive territory this month and also last month after revisions. It is still not indicating a robust consumer. We are looking forward to this month's numbers for any positive change on this front.

Non-farm payrolls have stubbornly been too good indicating economy is still adding jobs. This month the jobs number came below expectation and yet too high to indicate any slowdown in job growth.

Total Vehicle sales continues to be within its trend band higher, which is a good sign. New cars are scarce in dealer lots.

The used car prices have continued the price decline over the past few months. This has helped the headline inflation in its downward trend.

New home sales are continuing their trend higher.

The mortgage rates have climbed higher along with 10-year Treasury yield over the last month as FED rhetoric has pushed interest rate expectations a bit higher.

The unemployment rate has remained low despite the FED's attempt to induce a slowdown. This indicator is a lagging indicator and we do expect to see this number creep up as recession becomes imminent.

This chart will be the first indicator of a telltale sign that unemployment is increasing. As you see the continuing jobless claims number rise, it implies the people who lost their jobs are not going back to labor force fast enough and the unemployment rate is starting to creep higher. Over the last couple of weeks, it has trended lower, indicating a robust jobs market.

Interestingly, the rate of change in job postings is reducing but the total jobs are still rising according to this indicator. While this is consistent with the Bureau of Labor Statistics (BLS) report on job openings to unemployed, we expect to see some sharp corrections if a recession is imminent.

This month again, the wage inflation continues to exceed the headline inflation as it recorded a reading of 5.5% compared to the headline inflation of 3.2%. This is an indication that inflation is being entrenched in the labor market and may lead to wage/price spiral. Something that the FED does not want to see and makes it likely to keep rates higher for longer. We are likely to hear from the FED at Jackson Hole regarding this.

The yield curve has de-inverted over the last month as the inflation has come down and the 10-year Treasury yield has climbed.

Yield curve - Then

Yield curve - Now
Notice how the long end of the curve has risen! This has been the driver of many a price moves in the markets this month.

Year to date, technology, consumer discretionary, industrials and communication sectors have been the leaders. Lately, the breadth in the markets has been widening followed by a strong performance by tech earlier in the year.

If the economy were to enter a recession, it is likely that some of the companies will struggle to keep up with their debt payments causing their credit spread to widen. This indicator shows how the credit spreads have been behaving so far.

The spreads have been very tame and no observation of spikes in spreads yet indicating a credit crunch. Some market participants are taking the cue from the equity markets to suggest high yield may be getting into risky territory and we may see some spikes fairly soon.

A spike in put / call ratio indicates that investors are very apprehensive about a sudden fall in the equity markets. In July, we have seen some interesting activities but nothing out of the ordinary. The VIX index has moved around in sympathy.

The current earnings forecast by equity analysts estimate the earnings potential for S&P 500 companies to be around $235 which translates to a price to earnings ratio of 19.2 at the current S&P 500 price level. This is above the 5 year and 10 year averages.

It is likely that as inflation comes down, so will the earnings numbers. This indicates that the future S&P 500 price level could likely come down. Based on the companies that have reported so far for Q2 2023 (about 84%), the earnings have declined by -5.2%.

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