The Anatomy of a Recession by ClearBridge Investments is a precise tool designed to evaluate the risk of a U.S. recession. Utilising a set of 12 economic indicators, it provides a comprehensive insight into the country’s economic status on a monthly basis.
Strongly predicts coming recession ✅
The Background
The Anatomy of a Recession program by ClearBridge Investments is a mechanism designed to evaluate the potential onset of a recession in the U.S. economy. It was developed by Investment Strategist Jeffrey Schulze, who aimed to provide a structured, data-driven approach to gauge the likelihood of a recession by analysing various economic indicators.
The program explores a diverse set of 12 economic indicators to provide a comprehensive view of the U.S. economy’s health. This set of indicators is referred to as the Recession Risk Dashboard, and it’s updated monthly to reflect the most recent data.
Whilst they don’t publish exactly what data they are looking at, nor their method for judging whether the indicator is suggesting recession, we understand most of them enough to be able to comment on their current state below.
Where we don’t have the data source, we are copying their sentiment from their website.
The Metrics
| Indicator | Current State | Recession? |
|---|---|---|
| Consumer: | ||
| Housing Permits | In decline | ✅ |
| Job Sentiment | Job Quits dropping | ✅ |
| Jobless Claims | Sideways movement, no signal | ➖ |
| Retail Sales | * Real retail sales are up | ✅ |
| Wage Growth | Down 50% from high in Jan ’22 | ✅ |
| Business Activity: | ||
| Commodities | unsure of data source | ✅ |
| ISM New Orders | **new orders up 17% from Aug ’23 | ✅ |
| Profit Margins | Unsure of data source | ✅ |
| Truck Shipments | Truck tonnage up from Apr ’23 low | ➖ |
| Financial: | ||
| Credit Spreads | Unsure of data source | ✅ |
| Money Supply | M1 contracting from Jan ’22 high | ✅ |
| Yield Curve | Inverted | ✅ |
*Real retail sales are up, so we are not sure why Clearbank have chosen to show Retail sales as indicating a recession
** New orders are down from high in 2021, but up 17% from local bottom in Aug ’23. We’re not sure how Clearbank rates this as a sign of recession, but they have.
The narrative
ClearBridge Investments have chosen these metrics, likely because they each offer a unique perspective on the U.S. economy’s health. A decrease in Housing Permits could be seen as a leading indicator of a construction slowdown, possibly reflecting lower consumer confidence and reduced spending.
The stance on Job Sentiment and the volume of Jobless Claims provide a lens into the employment market; a negative sentiment and increased claims may hint at a tightening job market, often associated with economic downturns.
Retail Sales and Wage Growth are chosen likely for their direct reflection of consumer confidence and spending ability. A decline in retail sales and stagnant wages could signal economic conservatism among consumers, usually in response to or in anticipation of economic challenges.
Commodities pricing and ISM New Orders are likely included to provide insight into the demand and supply dynamics.
Escalating commodity prices can indicate inflationary pressures, while a drop in new orders may reflect declining manufacturing activity, both of which are often seen in pre-recession periods.
Profit Margins might have been chosen because they offer a glimpse into business profitability. A contraction in profit margins could indicate rising costs or declining revenue, both of which could signal an economic downturn if widespread across multiple sectors.
Truck Shipments might have been selected to provide insight into the level of goods being shipped, reflecting demand and economic activity. A reduction in truck shipments could signify a decrease in consumer and business demand, often a precursor to economic slowdowns.
Credit Spreads might have been included to highlight the difference in yield between corporate and government bonds, indicating perceived corporate sector risk. Widening credit spreads could signal increasing risk aversion or declining corporate health, often seen during the lead-up to a recession.
Money Supply might have been chosen for its ability to reflect liquidity in the economy. A contraction in money supply could indicate tighter monetary conditions, often associated with economic slowdowns.
By taking a monthly snapshot of these diverse indicators, ClearBridge Investment covers a broad spectrum of economic facets, ranging from consumer spending and employment to business profitability and market risks.
This regular analysis aims to provide a holistic understanding of the economic environment, capturing the nuanced interplay of various economic sectors.
Where are we?
Based on Clearbridge Investments last update, there are a lot of ticks on the table. Some metrics are starting to move against the recession narrative (real sales and new orders) so it will be interesting to see whether they relegate these to a ➖ in their next update.
Otherwise, according to this, it’s just a question of when not if.
Strongly suggests incoming recession ✅
Credit
All credit goes to Jeffrey Schulze and his team a Clearbridge Investments.
You can find more on the Anatomy of a Recession on Clearbridge’s website here: https://www.clearbridgeinvestments.com.au/perspectives/anatomy-of-a-recession/