Recession? Not so fast! Unemployment Rate declines to 3.5%

The July jobs number today far exceeded expectations, increasing by 528,000, much faster than consensus for 250,000 jobs and above June’s upwardly revised 398,000 level, up from 372,000. This took the unemployment rate down from 3.6% to 3.5%.  So much for a slowdown! There was a lot of hand wringing after the second quarter GDP, which came in at a negative 0.9%, putting the US economy into a technical recession.  The conventional definition of a recession is two consecutive quarters of negative GDP.  We have held that “this time it’s different” because recessions are usually not associated with full employment. There are currently about two jobs available for every worker seeking a job. That is not consistent with a recession.  

Economists in the recession camp ignore how highly distorted inventories had become due to the pandemic.  We went from an economy just six months ago where companies like Walmart and Target bought anything their purchasing managers could get their hands on to “OMG, we have too much of the wrong inventory”!  This is playing out quite dramatically at the big box retailers, slashing prices to clear unwanted inventory. We could see this inventory overhang in the last two GDP reports.  In fact, inventories impacted Q2 GDP by negative 2%. Without these pandemic-induced inventory distortions, GDP would still be positive in 2022. 

That sets up an interesting market for the rest of the year.  Earnings of our companies are coming in better than expected. As my partner, Terry Gardner, pointed out in his last video, earnings growth estimates are coming down, but key areas like technology (cloud computing and semiconductors) are still showing robust growth.  The consumer also continues to show up.  Based on the data collected by our friends at Evercore ISI, Amazon’s web traffic is tracking well above the last two years. Aggregated Retail web traffic improved significantly in July and turned positive for the first time this year. Amazon’s Prime Day event on July 12 & 13 successfully pushed its online traffic higher. Compared to 2021, its composite web traffic was up 4% and is up 25% vs 2019.  The market has not gone unnoticed; Amazon’s stock is up 35% off its recent low.

We are often asked if June was a bottom for the market. The honest answer is, that we don’t know. For some help with this, we look to technical analysis.  Our former ISI colleague and current RenMac Chairman and CEO, Jeff DeGraaf put out a very interesting piece of technical analysis:  The 20-day highs on the S&P500 expanded to 56% last week, which according to Jeff, is a rare and historically bullish message that should be heeded.  He points out that whenever 20-day new highs are above 54%, there has never been a negative return for the next 12 months. Jeff also points out that bear market rallies and bottoms for markets all look the same from a technical standpoint.

We are clearly not out of the woods.  There is still the Ukraine conflict and an energy crisis in Europe which will put these economies into a recession. There are uncertainties about the Chinese economy and its no tolerance for covid policy. The Fed will still raise rates aggressively to fight inflation within the context of an overheated US economy. Markets are up 13% since the low mid-June, which also coincided with a peak in Treasury yields. We will see if the bond market is correctly forecasting a peak in inflation. The next data point on inflation is on August 10.  That number will be a market mover!

Stay tuned…

Bernhard Koepp is CEO and Portfolio Manager at C.J. Lawrence. Contact him a bkoepp@cjlawrence.com by telephone at 212-888-6342.