Feeling like Goldilocks...

Typically, you get most attention on social media like financial twitter (or X) by publishing the most shocking graph of the weak economic situation and announcing in the same breath that the recession is just around the corner. It remains the responsibility of the viewer to decide how relevant the publication is as a predictor of the recession. TS Lombard published a series of highly popular macro figures, from which you can read a contradicting story about the economic picture: Essentially, the question is whether a recession is on its way or whether it is simply a normalization of the economy after an expectational situation.

Former US Treasury Secretary Larry Summers has criticized central banks for being too late in reacting to price development. Now Summers has joined a group that warns of another wave of inflation in the US like in the 1970s, and he shared a graph on X related to the theme.

TS Lombard offers the same graph with a wider timeline including the 1940s. It shows that it is still too early to declare that the second wave of inflation has started, especially based on oil price development. The world has changed a lot in 50 years and has become less dependent on oil. The dynamics of the economy are also otherwise different and many arguments still support the economy being more in a disinflationary environment than in a new wave.

Source: TS Lombard

What about US employment? It is a particularly honied subject for the bear enthusiasts, as employment has ultimately always declined with the recession, and employment figures show the most delay: the figures can be reasonable even if the recession is knocking at the door. Now, you can find several points in the data that are predictive of a recession: Downward adjustments in employment figures, the drop in monthly new jobs, and now, most recently, the change in temporary workers in the service sector. The figure has dropped drastically and development is very similar to that of the financial crisis.

Source: TS Lombard

A completely different picture is painted when you look at the situation of temporary workers in absolute numbers, not changes. As you can see from the graph, during the COVID pandemic the growth in the number of employed people was soaring and now we have come down from the peak. This mainly indicates a normalization of the labor market. When interpreting the figures, one should remember that the economy may well be headed for recession, but it is not yet included in macro data. A historical comparison is a good starting point, but the recession is still more of a prediction. The interpretation is further complicated by the fact that the past two years have been exceptional in the economy.

Source: TS Lombard

Lastly, I need to include one more graph that can easily justify differences between central banks, namely household interest costs relative to GDP. As the graph shows, interest payments are clearly higher in many Euro countries (Portugal, Spain, Italy) and the UK than in the US. So Europe and the UK are more interest sensitive than the US. It would be easy to conclude that it is time to stop raising interest rates on the old continent altogether, as the interest rate hikes are hitting us harder. A good argument, but not the only one behind the “stop interest rate hikes” theme.

Source: TS Lombard