May Recession Update

Author: Joe Maas, CIO, SPG Advisors, LLC

May Recession Update

Recession Indicators Summary
ISM Manufacturing IndexBelow average economic conditions
ISM Services IndexAverage economic conditions
Philadelphia Fed Aurora Diebold Scotti Business Conditions Index (ADS)Average economic conditions
Philadelphia Fed Business Outlook Survey (BOS)Below average economic conditions
Anxious IndexBelow average economic conditions
The Conference Board U.S Leading Economic Indicators IndexBelow average economic conditions
The Conference Board Employment Trends Index (ETI)Average economic conditions
Chicago Fed National Activity Index (CFNAI)Average economic conditions
Consensus: Based on these economic data points, a recession is highly likely in the next twelve months. We will continue to actively monitor and adjust portfolios as appropriate given the overall negative macroeconomic outlook.

Recession Definition: Broad-based, Persistent Decline in Economic Activity

ISM Manufacturing Index

Significance: The ISM Manufacturing Index, or the purchasing manager’s index, tracks US economic activity in the manufacturing sector, based on a survey of 300+ manufacturers. Readings above 50% demonstrate expansion, while readings below 50% demonstrate contraction in the manufacturing industry.

Frequency: Monthly

Current State of Index: The most recent ISM manufacturing PMI came in at 47.1%, above estimates and a slight uptick from March’s 46.3% index reading. This puts the twelve month average at 50.1%, a neutral reading for the index, that will likely slip into negative territory after a month or two more of contractionary data. Overall, the ISM manufacturing PMI points to negative economic growth in the manufacturing sector, which often is a precursor and bleeds into other aspects of the wider economy.

ISM Services Index

Significance: Slightly younger than the ISM Manufacturing Index, the ISM Services Index, or the non-manufacturing index, tracks US economic activity in the services sector, based on a survey of 400+ services firms. Readings above 50% demonstrate economic expansion, while readings below 50% demonstrate contraction in the services industry at large.

Frequency: Monthly

Current State of Index: April’s ISM Services PMI demonstrated a continually strong services industry, marked by higher wages and a demand shift towards service-focused products rather than tangible goods, with the index at 51.9%. Overall the last twelve months, this index has cooled from the mid-50s to a more neutral 51-52% range, with the current on year average at 54.5%, a fair bit above the latest index reading.

Philadelphia Fed’s Aurora Diebold Scotti Business Conditions Index (ADS)

Significance: The ADS index is a lagging index of typical business cycle indicators including: initial jobless claims, monthly payroll employment, monthly industrial production, monthly real personal income less transfer payments, monthly real manufacturing & trade sales, and quarterly real GDP.  The index has an average value of 0, with positive readings indicating ideal business conditions and negative readings indicating non-ideal business conditions.

Frequency: Weekly

Current State of Index: As of May 20th, the ADS index sits at a positive +0.17, which it has hovered near since early April. In the last year, the ADS Index has floated between +0.50 and -0.50, however there has not been a clear trend towards a bullish or bearish sentiment, as strong labor markets make up a significant portion of this index.

Philadelphia Fed’s Business Outlook Survey (BOS)

Significance: Philly Fed’s BOS indicator surveys manufacturers in the Third Federal Reserve district of the Philly area. It asks many questions about overall business activity in manufacturing, such as employment, prices paid, and inventories.

Frequency: Monthly

Current State of Index: As of the May survey, the Philadelphia Federal Reserve Bank reports continued slowing in the region’s manufacturing sector, with the current activity index up to -10.4, up a bit from last month’s -31.3 but still in deep negative territory, a recessionary indicator. Firms in the survey also reported that they expect prices to continue rising steadily, but annual wage inflation to settle closer to 4% this year.

Anxious Index

Significance: The anxious index is a survey of professional forecasters’ probabilities of real GDP declining in the next quarter. The data point has exceeded 40% in all eight of the recessionary periods since 1968.

Frequency: Quarterly

Current State of Index: The results of Q2 2023’s anxious index indicate a 38.8% probability of real GDP decline in the second quarter of 2023, according to professional forecasters. Although down from last quarter’s predictions, this high probability of a negative quarter does not bode well for the overall economy, especially when looking ahead to predictions for Q3 & Q4, which both sit above 40% and have increased in the most recent quarterly forecast.

The Conference Board U.S Leading Economic Indicators Index

Significance: This tracks ten leading economic indicators such as manufacturing data, the S&P 500, and the 10 year UST to Federal Funds rate spread. It aims to lead turning points in the business cycle by about 7 months and has fairly accurately done this over the last 20+ years.

Frequency: Monthly

Current State of Index: Updated on May 18th, the April LEI index declined 0.6% from March, which marks the thirteenth consecutive month of the index’s decline. Lower average consumer expectations for business conditions, a lower ISM New Orders Index, a wider 10 year US treasury to Fed Funds yield spread, and a lower Leading Credit Index were among the most impactful categories on this leading index. The LEI is one of the most bearish economic indicators, showing an increasingly higher probability of an economic downturn in the near term.

The Conference Board Employment Trends Index (ETI)

Significance: The employment trends index tracks eight employment indicators such as employment surveys, initial claims data, and job openings to more widely gauge the employment markets.

Frequency: Monthly

Current State of Index: As of May 8th, the Employment Trends Index increased to 116.2, up from March’s downwardly revised 115.5, a good sign for employees. The labor market is just beginning to soften, as in a survey of CEO’s confidence, 66% of CEOs expect a net reduction in their workforce or a little changed workforce over the next twelve months, making this index a neutral indicator.

Chicago Fed National Activity Index (CFNAI)

Significance: The CFNAI aims to track overall economic activity and inflationary pressure through metrics of production and income, employment, personal consumption and housing, and inventory sales and orders. A reading of 0 is average, a reading above 0 demonstrates strong economic activity, and a reading below 0 demonstrates weaker economic activity.

Frequency: Monthly

Current State of Index: As of May 25th, the Chicago Fed’s National Activity Index sits at a barely positive +0.07, up slightly from the last few months of negative data, due to higher production in April. Lower personal consumption and lower sales pulled these production gains down to make the CFNAI a neutral indicator for the time being. We will continue to monitor this index often for new trends and challenges.

In all macroeconomic environments, our team of talented analysts will continue to constantly monitor economic data as it rolls out to best manage each portfolio.

Thank you for your trust.

Thank you for your trust.

Joe Maas, CIO of SPG Advisors, LLC

The information contained herein is general in nature. It does not take into account your particular investment objectives, financial situation, or needs. It is provided for illustrative or informational purposes only, and should not be construed as advice. Our advisors can meet with you to discuss your retirement plan.

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