Will Rising Unemployment Trigger A Recession? | Michael Kantrowitz

An important update on the H.O.P.E. framework

Despite the Federal Reserve's efforts to tame inflation by cooling the economy with its aggressive "higher for longer" interest rates and Quantitative Tightening, the US has managed to avoid recession.

Consumer spending has held up, largely due to the "strong" jobs market.

But is that likely to remain the case going forward?

The unemployment rate has now risen to 4%. But more importantly, the year-over-year growth in unemployment is now over 10%.

The last 11 times in history this has been the case, we’ve entered recession.

Will that happen again this time?

To find out, we have the good fortune to speak today with Michael Kantrowitz, chief investment strategist & managing director at Piper Sandler. He's created the HOPE framework, which provides a way for us to track recession risk, and gives us the ability to project what's likely to happen next for the economy.

Michael's forecast is surprisingly nuanced and contains elements both bulls & bears should heed.

To hear it, click here or on the image below:

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Adam’s Notes: Michael Kantrowitz (recorded 6.10.24)

EXECUTIVE SUMMARY

• Michael sees the global economy as having been surprisingly resilience to-date, but now experiencing a slow, almost glacial pace of deceleration. Investors and policymakers are overly dependent on data, making it possible to support both bullish and bearish outlooks. Despite the mixed data, the stock market has shown resilience, benefiting from expectations of upcoming Federal Reserve rate cuts. The mixed signals and bifurcation in the data imply a complex economic environment, yet there remains potential upside for equities in 2024.

• Michael’s HOPE framework provides a structured way to track recession risk and predict economic trends by focusing on Housing, Orders, Profits, and Employment. This framework highlights the sequential reaction of different economic segments to changes in monetary policy. For example, housing reacts within a few months to interest rate changes, while employment can take up to two years. This methodology has helped navigate mixed economic signals, offering clarity in times of uncertainty.

• Right now, the HOPE framework is signaling late-state cycle deterioration:

  • Housing: continued weakness

  • Orders: stuck in contraction

  • Profits: bifurcated, with the small number of wildly profitable companies pulling up the average. Time-shifted correlation with Orders suggests this will start weakening in a quarter or so.

  • Employment: increasingly vulnerable

• The housing market displays unusual patterns with high home prices despite significantly increased mortgage rates, attributed to low inventory and homeowners being locked into low rates. Builder sentiment, as measured by the National Association of Home Builders (NAHB) Index, has significantly dropped, while mortgage applications are near 25-year lows. Building permits and housing starts have not recovered from their 2022 decline. The perception of affordability is at historical lows, with only 5% of consumers considering current home prices and mortgage rates favorable. Despite these issues and other risks, Michael sees a sharp drop in home prices as unlikely without a substantial rise in unemployment.

• The economy shows significant bifurcation, where higher income consumers and large companies with robust balance sheets and economies of scale are performing well, while lower-income consumers and small businesses struggle. This disparity has widened post-COVID, exacerbating income inequality (consumers), profit inequality (corporations) and market imbalances (stocks).

• Employment data indicates a rising unemployment rate, signaling a late-cycle economic phase. The unemployment rate has risen to 4%, and the number of unemployed individuals has increased by 10.6% year-on-year. Readings above 10% have accurately predicted recessions 11 out of 11 times since 1950.

• Michael is not certain that a “hard landing” lies ahead, and his thinking on this has evolved since his more bearish outlook last year. Firstly, there is