Anatomy of a Recession: The More Things Change...

Key Takeaways

• The overall economic backdrop remains healthy as illustrated by a continued green signal for the ClearBridge Recession Risk Dashboard, despite softer Retail Sales and consumer confidence.
• A strong print for ISM Manufacturing New Orders and positive signals from several other ISM sub-components suggest building optimism as we enter fall.
• The disappointing August jobs report was primarily due to the impact of the Delta variant on leisure and hospitality employment but sets up the potential for a goldilocks scenario with the Federal Reserve on hold longer, and a possible economic reacceleration as Delta subsides.

Economy and Markets Continue to Defy Wall of Worry

With fall upon us in the United States, change is in the air. The days are getting shorter, the mornings chillier, and back-to-school has arrived. However, the more things change, they more they stay the same. The ClearBridge Recession Risk Dashboard continues to emanate an overall green expansionary signal, with no changes this month meaning all 12 underlying indicators remain green. In fact, more signals saw improvement beneath the surface than deterioration over the last month, meaning the overall reading continues to improve from a very strong starting point.

Exhibit 1: ClearBridge Recession Risk Dashboard

Source: ClearBridge Investments.

Another thing that hasn’t changed is market and macro fear and risk. Some market observers are worried about an economic soft patch in the coming months. This week expanded unemployment insurance (UI) benefits expire in the remaining 25 states that did not opt out early, impacting about 11 million individuals. Further, the rise in COVID-19 cases from the spread of the Delta variant has caused some individuals to retrench. This is evident in recent data with Retail Sales widely missing expectations although year-over-year (YoY) growth – which the dashboard focuses on – remains quite robust at +15.8%.

Another example is consumer confidence, which has plunged over the last two months. The dashboard’s Job Sentiment metric utilises data contained within the Conference Board survey, specifically the differential between jobs “plentiful” and jobs “hard to get” responses, which held up much better, declining a meager 1.3 points from last month’s two-decade high. Importantly, the rapid decline in the headline metric could prove to be a contra-indicator. When consumer confidence has historically seen a decline equivalent or worse than the -15.1 points seen over the last two months, the S&P 500 Index has delivered a 12.9% return over the subsequent year. When looking at the six non-recessionary periods only – likely a more appropriate comparison given current economic conditions – the return is an even stronger 16.5% with all six periods delivering positive returns. Similarly encouraging is the rebound in the weekly Consumer Comfort Index which printed a new post-pandemic high last week.