Strong MBA Applications Growth
The only way you can say the housing market signaled a recession is if you say the late 2018-early 2019 weakness was the warning sign. However, that’s dubious because housing is strong now. If the consumer really was in the tank, we wouldn’t see cycle highs in new and existing home sales. The decline in rates wouldn’t be enough to help housing if people didn’t have jobs. To me, this seems like a slowdown rather than a recession. Even the terrible ISM manufacturing PMI isn’t in recessionary territory. To be clear, with the stock market’s decline in early October, the market priced in an increased chance of a recession. If it thought a recession was likely, we’d see the S&P 500 down over 10%.
Supporting the notion that the housing market is about to lead economic growth higher in the next few months was the MBA Mortgage Applications index from the week of September 27th. The composite index was up 8.1% weekly after falling 10.1%. It was up because the refinance index exploded up 15% after falling 14%. This week (week after MBA report) the average 30 year fixed mortgage rate actually increased 1 basis point to 3.65% which is surprising given the decline in treasury yields. This doesn’t mean rates are done falling though. I see them falling in October if yields don’t spike.
The purchase index also was strong as weekly growth was 1% after falling 3%. Yearly growth was 10% which made the growth in the past 3 weeks the best streak this year. Autumn has been great for housing this cycle; this year will be no different. Yearly growth in all housing metrics will be very strong in Q4 because of the easy comps. However, even without them, growth would be solid because cycle highs are being made.
Challenger Job Cuts Fall
The economy isn’t in a recession now unless all the labor data is wrong. Growth in payrolls and ADP has slowed, but this still isn’t a recession. You can’t just hyper focus on the bad data and ignore the good data. It’s tempting to simplify everything and go with one narrative. However, the data is mixed. It’s usually mixed. The one time almost every data point was in line was in 2008 when the economy was cratering.
Specifically, the number of job cuts in September fell from 53,480 to 41,557. The recent trend isn’t great, but you generally don’t see job cuts fall in recessions or near recessions. In Q3, job cuts were up 10.8% from last year and in September they were up 28%. Even though that growth looks bad, this was the 2nd lowest month of job cuts in 2019. This report was much more problematic earlier in the year. You can see how bad this report was earlier in the year because year to date cuts are 464,869 which is a 27.9% increase from last year and the highest total since 2015. If job cuts were high in September, year to date cuts would be consistent with a recession. Sequentially, Q3 job cuts fell 4.8%; they are headed in the right direction.
Let’s quickly look at the top industries for job cuts in 2019. Even though retail has had 65,358 announced job cuts which is the highest out of any industry, cuts are down from 85,385 last year. Job cuts could increase in October because of the Forever 21 bankruptcy. I don’t think this bankruptcy means anything about the health of the consumer. Clicks on its website plummeted, so it went bust and is closing stores. It lost out to the competition.
There were big job cut increases in industrial goods, automotive, and tech as the table below shows. Tech and the industrials have been hurt by the trade war. As I mentioned in a previous article, September auto sales have been challenging at Nissan, Toyota, Ford, and Honda. Tesla also reported disappointing quarterly deliveries as they were 97,000 instead of 97,477. Full year revenue growth is expected to be -15%. That’s not what you’d expect from a growth firm.
Jobless Claims Stay Low
Job cuts fell in September and jobless claims in the week of September 28th were 219,000 (up 4,000 from last week). That’s not recessionary data. It’s not even close. There might be a slowdown in consumption growth, but it won’t plummet unless people start getting fired. The 4 week moving average of jobless claims was 212,500 which was unchanged from the previous week. Continuing claims fell 5,000 and the 4 week average fell 5,750 to 1.662 million.
Markit Services PMI Meets Estimates
Once again, the Markit PMI didn’t fall as much as the ISM PMI (it actually increased). The difference this time is the Markit services PMI is below the ISM non-manufacturing PMI. Don’t think the Markit services PMI wasn’t weak just because it rose. The charts below show the differences between the PMIs in both sectors. It seems to be good news that the Markit manufacturing PMI is above the ISM PMI as it was above the ISM PMI near the bottom last slowdown. The Markit services PMI has been below the ISM PMI for a while. The difference is smaller than it has been recently.
Specifically, the Markit services PMI rose from 50.7 to 50.9 which is in line with the flash reading. This put the composite PMI at 51. The details of the service sector report were terrible. New business growth fell to the lowest level in the history of this survey (it started almost 10 years ago). The quarterly average PMI was the weakest in 3 years.
New export orders fell at the quickest rate since the series began in 2014. The employment reading signaled contraction the first time since February 2010. Backlogs fell at the quickest rate since April 2014. Input costs fell for the 2nd time in 10 years. The trade war and weak global growth caused yearly output expectations to be the 2nd weakest in the survey’s history. Exactly in line with the ISM manufacturing PMI, the composite Markit PMI is in line with 1.5% GDP growth. It’s also in line with below 100,000 jobs created. I’m expecting a miss on Friday.
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