More On The Recession Debate

Stocks dropped and bonds rallied this morning in response to ADP’s monthly jobs report (see below). The VIX Index ticked up to 21 and gold rallied about .6%. Oddly, traders seem to be brushing aside a couple of better than expected business activity reports (see below). My guess is that stocks reverse and close flat or up on the day.

Payroll processor ADP says the US economy added only 99,000 new jobs in August compared to 145,000 expected. That’s the lowest monthly tally in over three years. The economy has added a very healthy two million new jobs over the past year, but momentum is clearly beginning to slow. That said, we’re just not seeing a meaningful pick-up in layoffs. According to the Challenger Job Cuts report (also out today) layoffs are up only 1.0% from year-ago levels. And new filings for unemployment benefits haven’t spiked. Bloomberg Economist Eliza Winger puts it this way: “The latest jobless claims data continue to imply that layoffs are low, with companies hesitant to let workers go.” That said, a number of companies have implemented hiring freezes.

In a CNBC interview today PIMCO Portfolio Manager Mike Cudzil said the job market is simply normalizing from an overheated post-Covid condition. And he cautions not to read too much negativity into it. Of course, too much negativity perfectly describes the bond market’s reaction. Over the past few years, bond prices have been volatile, consistently mis-pricing expectations for economic growth, Fed policy and inflation. Mr. Cudzil explains, “In the last 20 months, we’ve seen about six or seven different narratives, and markets run from one side of the room to the other, from recession to growth…and everything between. And yet the 10-year [Treasury] Note is dramatically unchanged.”

In response to a question about a potential recession, he said, “Just because you say the word recession three times…it’s not like Beetlejuice…it doesn’t just happen. [Investors predicted] recession at the end of 2022 [then] the end of 2023 [and now] the recession narrative has gained hold again.” But this is an economy that continues to move forward.” In PIMCO’s view, it may slow but isn’t headed for recession.

Right on cue, two separate services business activity indices were released for August, which showed improvement. ISM’s Services Index ticked up to 51.5 from 51.4. More importantly, the “new orders” component of the index rose to 53.0, and that signals more improvement in coming months. S&P Global’s US Services Index popped to 55.7 from 55.2. These business activity reports use 50.0 as the dividing line between expanding and contracting business conditions. The bottom line is that neither index suggests recession is on the way.