First and foremost, the American bears in the 2nd half of 2019 might go down as one of the worst group of recession callers we have seen in the last 50 years.
Before this agent of death declared war on the human race, literally, almost all the economic data was showing expansion, and its March 6th, 2020, now. All you have to be is a coherent 10-year-old kid to know you blew it big time, again.
Regional PMI = Better
Leading Economic Indicators = All-time highs
Housing Starts, Permits, New Home Sales, and Existing Home Sales were getting better.
Retail sales were still growing.
Non-Manufacturing ISM data got better.
Today’s job report showed a gain of 273,000
3-month average growth running at 243,000
From BLS:
https://www.bls.gov/news.release/pdf/empsit.pdf
Total nonfarm payroll employment rose by 273,000 in February, and the unemployment rate was little changed at 3.5 percent, the U.S. Bureau of Labor Statistics reported today. Notable job gains occurred in health care and social assistance, food services and drinking places, government, construction, professional and technical services, and financial activities.
From Doug Short:
https://www.advisorperspectives.com/dshort/updates/2020/03/06/february-jobs-report-273k-new-jobs-surprises-forecast
From BLS:
https://www.bls.gov/charts/employment-situation/employment-by-industry-monthly-changes.htm
For 2020 job growth I was looking for
“I expect job numbers to fall to 98,000- 124,000 once you exclude census workers from the data. The job markets look very healthy.”
https://loganmohtashami.com/2019/12/28/2020-economic-housing-forecast/
We are well above this level, even if I took off the big government job created number this month.
However, now comes the Chaos Theory and the Butterfly Effect. This is something I brought up on February 3rd in my HousingWire article. Where I discussed how we have had 3 quarters of negative growth in this record expansion. Also, we have had 4 times in this cycle where growth slowed below 1%, one time .50% growth for back to back quarters in 2012.
In chaos theory, the butterfly effect refers to the idea that due to the interconnectedness of all things, a small event can result in significant effects on a nonlinear, dynamic system.
The butterfly effect gets its name from the metaphor that even small swirls of air caused by the flapping of a butterfly’s wings can change the path of a tornado, also though the system is far removed in space and time from the first event.
In many ways, we see this theory manifest in the U.S. bond and stock market – a dynamic system that is prone to the influences of distant perturbations.
Case in point, a virus outbreak among an urban population of a distant country may lead to a lower rate of growth in the economy in 2020. But it could also lead to a lower 10-year yield and thus lower mortgage rates for the housing market.
https://www.housingwire.com/articles/from-boeing-to-brexit-7-major-storylines-that-could-send-mortgage-rates-even-lower/
Regarding the Bond Market:
The big difference between this year from last year is that when I said the 10-year yield can go below 1% last year, it needed help from many things coming together. This year it’s all about the agent of death called COV-19. This does have a real economic impact as the story gets worse and worse every day.
The 10-Year Yield Under 1% Part II
https://loganmohtashami.com/2020/03/02/the-10-year-yield-under-1-part-ii/
I am giving this event a hardcore 6-month timeline at most to really impact the economic data because this isn’t just a supply shock, its a demand shock as well. We just don’t know how American consumers are going to act over the next 6 months. We already see flying and convention cancellation. This aspect is a demand shock, 100% related to COV-19.
So, to combat this agent of death, I recently recommended these 3 items on HousingWire because I believe in 6 months, we should have a better grip around this devil.
- Institute an instant payroll tax cut to help prepare families for a possible economic downturn and to assist with any extra costs associated with virus prevention.
- Provide an open-ended emergency assistance fund for businesses, self-employed workers, local government agencies and individuals who have incurred costs or financial hardship due to the spread of the virus or containment measures.
- Government funding to pay for all COVID-19 related medical bills including quarantine costs. Free tests for those with symptoms and free vaccines when they become available.
https://www.housingwire.com/articles/can-the-housing-market-withstand-the-coronavirus/
A stimulus package would be a short term event and would alleviate some of the short term pain until the world defeats this virus. Then we can go back to pre agent of death economic discussion. The bond market is screaming for a fiscal response. The Fed cutting rates won’t be that useful now.
Regarding my 6 recession flag model. Sorry bears not there just yet. While I can connect 2 of my last 3 flags over the next 4-6 months, not all 6 flags can go up. The virus itself is a red flag as it can create a supply and demand shock. PMI/ISM weakness with a possible noticeable rise in jobless claims can bring Leading economic indicators down. That data line should recover after we defeat the virus.
The third one, housing starts falling into a recession, doesn’t look like its in the works this year. If significant containment policies where implemented Short term that will impact housing but that will end in time, and we go back to pre coronavirus trends, which has boosted 6 straight weeks of double-digit year over year growth for purchase application data.
I am up for this fight against the American bears and this virus. We can use King Dollar right now to provide some relief!
As always, be the detective, not the troll. Show discipline in reading the economic data and take it one day at a time. Don’t assume the best or the worst outcomes. Read the data and what is going on in the world today.
One day once this virus ends, trust me, these American bears will be sprinting back to the darkness of their cold caves in the mountains.
Logan Mohtashami is a financial writer and blogger covering the U.S. economy with a specialization in the housing market. Logan Mohtashami is a senior loan officer at AMC Lending Group, which has been providing mortgage services for California residents since 1987. Logan also tracks all economic data daily on his Facebook page https://www.facebook.com/Logan.Mohtashami and is a contributor for HousingWire.