QUOTE OF THE WEEK
“Don’t stop when you’re tired, stop when you’re done.” – Wesley Snipes
TECH CORNER
The stock markets rallied last week on the news of a one percent month to month increase in retail spending. Much of that increase was due to a bounce back in auto sales. Remember the computer hack that shut down the auto dealers in June. I don’t see this changing the trend towards a recession. Retail sales for the last three years on a inflation adjusted basis has been flat so I don’t see how that is encouraging.
We still see a coming recession based on the data. Admittedly it has been much slower in arriving than we expected.
Here are just a few indicators that the economy is slowing:
The Philadelphia Manufacturing Index fell -7.0% last month vs the projected +7.9% increase.
Industrial production declined -0.6% in July (-1.1% including revisions to prior months) below the consensus expected drop of -0.3%
Overall Capacity utilization in July fell from 78.5% to 77.8%. Manufacturing capacity utilization in July fell to 77.2% from 77.5%. A drop below 77 is a strong sign of an impending recession.
Home builder’s confidence dropped from 42 to 39. Construction employment has been dropping fast. Which may be due to the high mortgage rates.
Credit spreads are continuing to widen which means it is getting more expensive in interest rates on bonds and loans to companies.
The negative yield curve of the 10yr note vs the 2yr Treasury bill is unwinding. This always means a recession will follow soon. Negative yield curves have always been followed by a recession.
And finally, the unemployment rate has risen to 4.3%. This move has triggered the Sahm Rule. The Sahm Rule identifies signals related to the start of a recession when the three-month moving average of the national unemployment rate (U3) rises by 0.50 percentage points or more relative to its low during the previous 12 months. This rule has a 100% record of predicting recessions.
We are currently positioned in high quality corporate bonds and Treasuries in the annuities. We are currently positioned in U.S. Government bills, notes, and bonds in the managed accounts. We anticipate that we will soon extend the duration of the U.S. government bonds in the managed accounts.
