Whenever I give the ‘all-clear’ to the US economy – even on a near-term basis, I am always a little uneasy given how little we know about the lasting impact the coronavirus will have. And sure enough, after yesterday’s post on the wherewithal of the US economy to withstand the shock over the next six months, data comes out disproving my claim.
So, I am going to have to reverse myself here on the near-term outlook, unfortunately. The coronavirus is a large and growing threat both to the global economy and the US economy. We cannot rule out a US recession, even in the short-term. My analysis follows below.
The Markit PMI data
The data set that has set off alarm bells for me is the Markit PMI. If you recall, it was the Markit data set which first heralded the pre-coronavirus recovery in manufacturing, even as the ISM data languished. Now, the Markit PMI data is showing trouble in the all-important services sectors of the US economy.
This is what they see as the key findings:
- Flash U.S. Composite Output Index at 49.6 (53.3 in January). 76-month low.
- Flash U.S. Services Business Activity Index at 49.4 (53.4 in January). 76-month low.
- Flash U.S. Manufacturing PMI at 50.8 (51.9 in January). 6-month low.
- Flash U.S. Manufacturing Output Index at 50.6 (52.4 in January). 7-month low
So, everything is down, with the services sector leading the composite PMI to a below-50 reading, a level not seen since 2013.
Even more worrisome is the new orders component, where “new orders received by private sector firms fell for the first time since data collection began in October 2009.”
These numbers are catastrophically bad.
Putting this in context
At the end of January, I wrote a post outlining a framework for thinking about tail risk. And the big takeaway then was that there are some worrying signs regarding the global economy. Maziar Minovi, who inspired my thinking in that post, was saying that, given where the global growth trajectory, we do have vulnerability to geopolitical and event risk in 2020. And that’s why a recession or a crisis in 2020 is at least a reasonable worst case scenario to worry about.
But, that was a global risk assessment. When I used the same thinking regarding the US, we were still well above stall speed – even yesterday, as I spelled out in yesterday’s post on the Democratic Primaries. The under 50 reading on the Markit Composite PMI changes all that. I told you just Tuesday that the downside risks from coronavirus are mounting. However, the Markit data says that the economic impact of the coronavirus outbreak has been so severe that it is already causing forward-looking data prints to plummet. And there’s no end in sight to when the impact of the virus will recede.
So, not only do we have to start thinking about a global recession, we also cannot rule out a near-term US recession either.
Supply Chains
At this point, it’s all about supply chains. The Apple warning put us on notice, prompting my Tuesday post. That was all about busted supply chains due to China’s economy unraveling. The Markit data is all about supply chains too. It says that the unraveling isn’t Apple specific and it isn’t a moderate downdraft. It is a severe and widespread disruption that is still ongoing.
I see Dan McMurtrie saying the base case for supply chain disruption is now two full quarters. And given what we’ve seen in the PMI data, that has the hallmarks of a recession written on it.
My view
Again, this is a complete Black Swan event and we are still getting to grips with how severe the economic impact will be. So, I don’t want to be alarmist. But, I must backpedal furiously here. I don’t care if the GDPNow data says +2.6% for Q1. The situation regarding coronavirus and supply chains is alarming. And a recession is now a reasonable possibility for 2020.
That’s bullish for Treasuries. But, if we do get a recession it is extremely negative for equities and high yield. And for Bernie Sanders’ political revolution, it may be a godsend.