- Albert Edwards of Societe Generale says a recession is already underway.
- That means corporate profits would plummet, the strategist said.
- Edwards also warned that declining payroll revisions would get worse.
According to Albert Edwards, the US economy is already in recession.
“The official US leading indicator tells us that a recession is a done deal, not tomorrow, not next week, but today,” the strategist at Societe Generale, who called the dot-com bust more than 20 years ago, said in a statement to customers on Thursday .
Edwards was referring to the Conference Board’s US Leading Economic Index, which takes 10 leading economic indicators and combines them into one composite metric. The index is now at levels consistent with the onset of past recessions. Recessions are shown in the gray areas below.
The Conference Board’s leading economic index
General society
Despite the data, the claim that we’re already in a recession might sound like a head-scratcher, as the Bureau of Labor Statistics reported on Friday that the unemployment rate fell back to 3.4%, its lowest level in more than 50 years years, and the US economy added 253,000 jobs, beating expectations of 180,000.
But as data continues to be released in the coming months, Edwards recommends paying attention to the details below the headlines.
“How can the economy be in recession when payrolls and GDP are still growing and so much of the other data, if not robust, maybe looks ok-ish?” he said. “The obvious answer, like early 2008, is revisions.”
In fact, the revisions to February and March numbers reported on Friday paint a picture of a slacking job market.
February job creations have been revised down to 248,000 from 326,000 and March’s number has been revised down to 165,000 from 236,000. March gains were the smallest since December 2020, when the economy shed jobs, and was well below the 290,000 average over the past six months.
Federal Reserve Bank of St Louis
corporate earnings and stock performance
Given his forecast that a recession is already underway, Edwards is pessimistic about future earnings trends for companies, saying they have a “really, very long way to go.”
This is especially because the profit margins are still high despite rising costs. Typically, rising costs put pressure on profit margins for companies, as shown in the chart below.
General society
“This surge in unit profits at a time when unit costs are rising sharply is a clear sign of corporate greedflation,” Edwards said. “It’s not what usually happens – ever.”
Ironically, Edwards argues that companies are hurting themselves by keeping costs high in order to boost profits because this further fuels inflation. More stubborn inflation means tighter monetary policy, he said.
“Investors are cheering ‘greedflation’ at the micro-company level as earnings are decent, but the macroeconomic impact on inflation and interest rates means a deeper and longer-lasting recession,” he wrote in an email to Insider. “I think the recession will cause margins and profits to collapse and do a lot of damage.”
Some of that damage will likely include a faltering stock market. Stock performance is closely related to corporate profits and earnings. Investors currently have high expectations of margins and earnings development.
what others say
Morgan Stanley CIO Mike Wilson said in a note to clients on Monday that investors are overly optimistic about future earnings and profit margins.
“The driving force behind the resilience in breadth of earnings revisions is the expectation that an upward move in EPS growth will materialize in 2H 23 and 24. It’s also rooted in the view that, by and large, companies already have appropriate levels of spending and that margin to expand now,” Wilson said contrary to leverage.”
Wilson sees the S&P 500 falling to somewhere between 3,000 and 3,300 in the coming months before recovering to 3,900 by the end of the year. With the index currently around 4,135, a drop to 3,000 would mean a 27% loss.
Mark Haefele, chief investment officer at UBS Global Wealth Management, also said this week that the market appears to be underpricing the downside risk.
“In our view, the market is pricing in a high probability of a near-perfect landing for the US economy,” he said.
Comerica Wealth Management CIO John Lynch also warned of an impending earnings slump.
“While recent data has beaten expectations, historically, a decline in earnings per share heralds cuts in employment and capital investment,” he said in a note to clients. “With sales and margins under pressure, companies should be on the lookout for the coming months to contain costs, which is weighing on economic activity and financial market performance.”
As for his view of the labor market, Edwards has company in Ian Shepherdson, chief economist at Pantheon Macroeconomics. He told Insiders this week that the job market was likely to collapse faster than investors realise, and that the lagging effect of rate hikes and the credit crunch that has been mounting in recent weeks means a recession is on our doorstep.
“If you look at previous cycles, the payroll numbers go from OK to terrible pretty quickly,” he said. “I’m very nervous that people looking at the backward-looking data are like, ‘Oh, well, the payrolls were still trending over 200,000 for the past few months, so it’s fine.’ Well, no, it means everything was fine, but it doesn’t guarantee things will stay fine.”
The market faces a number of hurdles in the coming weeks and months. The Federal Reserve is likely to pause rate hikes at its next meeting, but has said it intends to keep rates at their final levels through the end of 2023. Banks are also pulling back on lending, which weighs on consumer and business spending. The debt ceiling stalemate is also looming as the US could default on its debt as early as June.
There is also a risk that other banks will be closed. First Republic Bank, Silicon Valley Bank and Signature Bank have already died.
But the bulls remain, and they are betting on a scenario in which inflation continues to fall – it hit 5% in March, down from a peak of 9.1% last year – and the job market remains intact. As Edwards suggests, watch payroll revisions over the coming months to see if this scenario materializes.
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