Transcript: Look beyond the yield curve for recession signs
Canadian Equities, CIBC Global Asset Management
Now that the yield curve has inverted, every news outlet around is decrying fears of the next imminent recession. But just like when we look at stocks, we don't look at a single indicator to determine whether or not we should buy or sell the stock. I would advocate that it's better to take a holistic view of the economy when determining where we are in this economic cycle. The indicators that I look at include: jobs, housing, PMI or purchasing manager indices, business confidence, consumer confidence, credit trends and the overall health of the consumer.
[Text Reads: Key indicators include jobs, housing, PMI, business/consumer confidence, credit trends and consumer health]
[Title reads: Jobs]
First of all, on jobs, the leading indicator I look at is initial claims and continuing claims, and those are really at cycle lows right now and just starting to edge up slightly. I think it's better to look at something like the U6 unemployment rate, which measures those people that are unemployed, those that have stopped looking for work, as well as those people who would work more hours if they could find the work. That level is at the cycle low of about 7 percent and heading lower, meaning people are more confident and coming back into the workforce, suggesting future growth.
[Text Reads: Better to look at U6 unemployment rate]
[Text Reads: U6 also measures people who’ve stopped looking for work, and those wanting to work more hours]
[Title reads: Housing]
The next indicator is housing, and housing is important because a fall in home sales leads to a fall in home prices, which often precedes a recession. So, the leading indicator I look at is home permits and that's been on an upward trend. To me, that says that housing is not going to be the cause of the next recession.
[Text Reads: Lower home sales leads to falling prices, which often precedes a recession]
[Text Reads: Home permits (leading indicator) now trending upwards]
[Title reads: Purchasing Manager Indices (PMI)]
The next indicator, our purchasing manager indices or PMIs that people used to assess the health of the economy. And when the level is above 50, it means expansion, and when it's below 50, it means contraction.
[Text Reads: Purchasing Manager Indices (PMI) assess the overall health of the economy]
[Text Reads: PMI level above 50 means economic expansion, PMI level below 50 means economic contraction]
Globally, a lot of countries like Germany and Italy have entered recessionary territories with levels below 50. But the United States, although falling, is still hovering above 50.
[Images: The Frankfurt skyline, followed by helicopter shots of downtown Milan, followed by a street level view of the New York Stock Exchange in the evening]
However, when you combine it with servicing PMI, which makes up a much bigger part of the North American economy, that level is still in the mid to low 50s. It is off of its peak as well, however. So, it's something that we have to keep an eye on, but it's still an expansionary territory.
[Text Reads: Combining Purchasing with Servicing Manager Indices covers more of the economy]
[Text Reads: This level is still in mid-to-low 50s, off its peak]
[Text reads: Consumer health]
And then finally, the health of the consumer. Any way you cut it, whether it's debt levels—better in the United States than in Canada—but also consumer confidence and consumer expenditures. Those suggest to me that the health of the consumer is still robust.
[Images: Time-lapse images of people bustling in shopping malls, followed by cards being tapped on debit machines]
[Text reads: Putting it all together]
So putting it all together, instead of using that single rule-of-thumb indicator like then version of the yield curve to determine the next recession. I think it's better to take a more holistic approach. And when I do that, overall, there are some positives, some negatives that we have to keep an eye on. But overall, I would suggest that the economy is still progressing nicely without fears of an imminent recession that some people are calling for. That being said, I would advocate for avoid market timing altogether. No one has really demonstrated a great track record of being able to sell at the top and buy at the bottom. Instead, it'd be much more advantageous to look through the cycle. Instead, focus your time on investing in high quality growing companies with strong balance sheets and defendable competitive advantages such that they're well positioned. Whether or not we're going into or coming out of that next recession, whenever it may be.
[Text Reads: Consider high quality, growing companies with strong balance sheets and defendable competitive advantages]
[Text Reads: The views expressed in this video are the personal views of Craig Jerusalim and should not be taken as the views of CIBC Asset Management Inc. This video is provided for general informational purposes only and does not constitute financial, investment, tax, legal or accounting advice nor does it constitute an offer or solicitation to buy or sell any securities referred to. Individual circumstances and current events are critical to sound investment planning; anyone wishing to act on this document should consult with his or her advisor. All opinions and estimates expressed in this document are as of the date of publication unless otherwise indicated, and are subject to change.
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