Is a Recession Coming? December 2019 Update

A couple of months ago, we introduced the Recession Risk Dashboard being maintained by by Jeff Schulze and his team at ClearBridge Investments as part of a larger project called “Anatomy of A Recession.” Each month the Dashboard updates 12 recession-leading criteria or indicators their research has identified as helpful in evaluating whether the economy is expanding (green), mixed/caution (yellow) or contracting/recessionary (red).

Back at the end of Q2, the recession indicators moved from economic expansion to caution. In September one indicator, Job Sentiment, moved from yellow to green, one (ISM New Orders moved from yellow to red and one, Profit Margins, moved from green to yellow keeping the overall reading at “Caution” with 6 green, 3 yellow and 3 red.

We now have an update as of November 30 showing that the overall reading has remained the same with a key change in Wage Growth. Since a picture is often better than a paragraph, we start with one:

Key Takeaways [1]

The Wage Growth indicator has turned to red from yellow as wages continue to rise, particularly for lower earners. While this may be a short-term positive to consumption, over time it should lead to higher inflation as companies raise prices to defend margins. The Wage Growth indicator is one of the longer leading indicators on the ClearBridge Recession Risk Dashboard. As a result, this change does not signal a material shift in the near-term recessionary outlook. The Commodities indicator, meanwhile, has turned to yellow from red while the overall signal from the ClearBridge Recession Risk Dashboard remains unchanged at a cautionary yellow.

Unpacking this a bit further, consider this graph, again from Clearbridge:

By way of explanation, we offer further detail from Jeff Schulze, Clearbridge’s Investment Strategist, and his associate, Josh Jammer, Investment Strategy Analyst:

"Rising wages are a double-edged sword…On the positive side, higher wages can help boost consumption which tends to be the primary driver of U.S. economic activity [and] can also bolster savings…strengthen[ing] consumer balance sheets which should allow for greater spending in the event of a sustained slowdown. 

The downside…is the potential to hurt corporate profitability…If companies raise prices in order to maintain margins, this can lead to inflation which, in turn, can lead to a more hawkish U.S. Federal Reserve that raises rates more aggressively…layoffs could become more commonplace…This can drive a negative feedback loop…Tight monetary policy and rising unemployment can be a powerful recessionary concoction…

Corporate profits typically get squeezed the most when wage increases outpace productivity gains.  This is currently the case…The latest data does not show that wage pressures are abating, either…[2]"

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[1] Summarized in a broadcast email from Clearbridge on 12/4/2019. Emphasis added.

[2] Recession Indicators Update: Wage Pressures Mounting. Clearbridge Investments, Accessed 12/04/2019.

Ed Lynch is founder and CEO of FPG. He has worked with ERISA-qualified plan sponsors and designated fiduciaries in most aspects of plan development and maintenance since the early 1980s. Ed founded FPG with the mission to be a leader in the field of employee benefits and the most trusted source of information and evaluation in the retirement plan industry.