Stressed Out & Up

To say that the global economy is stressed is to state the obvious these days. The potential for implosion in one of the world’s major currencies is no trivial development. The great mystery is whether the rising stress on the system will unleash a new recession. That looks like a done deal in Europe by some accounts, although there’s still a lively debate about where the U.S. economy is headed. This much, however, is clear: the financial system is under pressure and so the threat of an economic contraction in the U.S. is higher these days. But tipping points are only obvious in hindsight, particularly during delicate periods such as the one currently blowing through the global economy.

One measure of the elevated risk is the St. Louis Fed’s Financial Stress Index, which has recently increased to the highest levels since 2009. The level of systemic stress is one factor. More ominously is the trend. In 2009, stress was declining. By contrast, stress was rising in 2008, a trend that coincided with a recession. The fact that this metric is now at elevated levels and increasing raises warning signs for the business cycle.

Financial stress alone isn’t enough to push an economy over a cliff. Much depends on the broader context. At the moment, there are mixed messages. Although some economists are predicting a new downturn for the U.S., many analysts expect the economy will avoid a contraction. One reason for thinking optimistically is stock market, which remains on the fence when it comes to discounting the future. Equities tend to fall on a year-over-year basis either just ahead of a new recession or during its early stages. At the moment, the S&P 500’s price change is roughly flat vs. a year ago.

But there’s a danger at looking at any one, or even a handful of numbers at such a precarious time. Any one factor can be flawed. But if you rank the various cyclical indicators at the moment you end up with a mixed bag. That leaves us looking to each new data update in search of the marginal change that may bring clarity, one way or the other. This Friday’s update on November employment surely falls into that category.
The consensus forecast for private nonfarm payrolls calls for a net gain of 141,000, according to If the prediction holds, it will represent an improvement over October’s 110,000 rise. As a preview of what Friday’s report may hold, later today we’ll see the ADP Employment Report for this month. Forecasts for this number are bubbly as well. Reuters reports that today’s ADP update “is expected to show its best reading since April and the third consecutive gain greater than 110,000.”
Art Hogan of Lazard Capital Markets clearly falls into the optimistic camp. He tells CNBC: Anticipating good news in Friday’s Labor Department report, he predicts that it’ll be “a better jobs reporting week than we’ve had in the past. The weekly jobless claims have been under 400,000 for a couple weeks, so the jobs number we get on Friday is probably going to have an upside surprise to it.”
If so, we may be poised to dodge the euro bullet. Recessions and expanding labor markets (even weakly expanding ones) aren’t natural allies. Every recession in the last 50 years has been accompanied by an annual decline in private sector nonfarm payrolls. As of October, we’re higher by 1.7% vs. a year earlier on that score. If November’s numbers maintain or improve on that pace, the recession talk will fade, at least for a few days.