[ad_1] Economic reports over the Thanksgiving holiday paint a complicated picture of what’s happening, and where we are on recession watch. The big economic surprise was the strength of Black Friday sales, where consumers spent a record $9.12 billion online. Another surprise was the Atlanta Fed’s forecast of 4.3% GDP growth in the fourth quarter, since the Atlanta Fed data was used by many to say that the U.S. went into a recession earlier in the year. The jobs data, however wasn’t a surprise: the unemployment rate is now 3.7% and jobless claims are still very low historically. With all the data we now have in front of us, we can say that the U.S. did not go into a recession at the start of 2022. The question now is whether there is a way to avoid the job-loss recession we’re facing in 2023. The U.S. housing market went into recession in June of this year, which I talked about a few months ago on CNBC. A recession means that sales and production are down. New and existing home sales are falling, along with housing permits and starts, as we have too many new homes for the builders to issue new permits. The job loss recession is already here in the housing market, and total incomes are falling with less volume in this sector. Although we don’t have this in the larger economy yet, housing traditionally gets weaker into a recession as it is a rate-sensitive sector of our economy. The Federal Reserve has forecast a 4.4% unemployment rate next year, which would mean an immediate 1% increase from the cycle lows in the unemployment rate, which again implies the job loss recession is something they’re looking for (I would even say want). Why do they want a job loss recession? Their main goal is to bring down inflation, and Americans losing their jobs is the fastest way to create more labor supply and weaker demand. Accordingly, I raised my sixth (and last) recession red flag on Aug. 5. It was apparent on Aug. 5 that the leading economic index was in a downtrend that is similar to every single recession we have seen for decades. The most recent leading economic index report has confirmed that the downtrend in the data is still intact. I discussed this with the Conference Board earlier this year as I presented my six recession red flag model to them. As always, with any index, you need to know the components and their weighting and understand how those components will look in the future. “The US LEI fell for an eighth consecutive month, suggesting the economy is possibly in a recession,” said Ataman Ozyildirim, senior director of economics, at The Conference Board in November. “The downturn in the LEI reflects consumers’ worsening outlook amid high inflation and rising interest rates, as well as declining prospects for housing construction and manufacturing. So with all these factors in place — housing already in a recession, the Fed’s recent actions and dealing with inflation — can we avoid this job loss recession? Yes, we can. It will be hard, and we will need a lot of help, but there is a pathway to this. Two things need to happen 1. Inflation growth rate and long bond yields need to go down together. The Fed is bent on driving us into a recession to make it easier to achieve their single mandate to bring down inflation. We have already seen some of the growth rates of inflation falling. The used and new car price growth rate is falling. As you all know, car production was terrible during the global pandemic, and we are working our way back to some sense of normal in auto production. Gasoline prices are also falling. We have a lot of variables here that are out of our control that make this sector a bit abnormal today, including the Russia wild card, releasing a lot of strategic reserves, and OPEC’s view of us. However, for now, gas prices are down. In addition, prices paid for transportation of products from China to the U.S. are falling from the COVID-19 peaks. China’s economy is in terrible shape with constant lockdowns. However, with less demand for goods from China, we are receiving less stuff and our port backlogs are resolving as we have become a bit more efficient at the ports. We used to have tons of boats in the waters of the Pacific waiting to be docked to take stuff to the stores. Now, this stressful aspect of transportation costs is gone and the fear of a downturn in the freight industry is taking hold. However, the biggest component of inflation isn’t the transportation cost of goods from China to the U.S., it’s rent shelter inflation, which makes up 42.2% of the consumer price index. Housing is the significant X factor in our economy; I believe the growth rate of shelter inflation is already cooling off, it just won’t get picked up on the CPI date until next year. In September, when the CPI inflation data was being reported on, I talked with CNBC about how this data line lags with the CPI data. In addition, we have a lot of two-unit construction built, which will bring more supply online. If we can get this to happen, the Fed can end their rate hikes once they get to their desired level over the next few months. If the bond market’s long end can fall, we can get mortgage rates back down to 5%. Why does 5% matter? Currently, rates have fallen from 7.375% to 6.62%, which has boosted the weekly demand data to be positive for three weeks. Last week we had a decline in the year-over-year negative data, which went from 46% year-over-year declines to 41%. Remember, a big talking point of mine is that we would have hard comps starting in October of this year on a year-over-year basis. Last year, purchase application data volume was
