Kantrowitz is also known for creating the H.O.P.E. framework, which stands for Housing, Orders, Profits, and Employment.
This framework delineates the sequence in which economic activity typically weakens before a recession, providing a structured approach to track and project economic trends and their potential impacts on the market
Strongly suggests recession ✅
The background
Michael Kantrowitz serves as the Chief Investment Strategist and Head of Portfolio Strategy at Piper Sandler, a leading investment bank and institutional securities firm.
His expertise is highly regarded in the field, especially in understanding the dynamics of economic cycles and their implications on investment strategies
The metrics
| Indicator | Current State | R? |
|---|---|---|
| Key Ingredients | ||
| Fed Tightening Cycle | Interest rates up to 6% | ✅ |
| Inflation Headwinds | CPI YoY hit 6.3% (up from 0.3%) Sep ’22 | ✅ |
| Lending Standards Tighten | Tightening standards hit 50% Jul ’23 | ✅ |
| H.O.P.E Framework | ||
| Housing Activity Declines | NAHB Index down 50% | ✅ |
| Orders (PMIs) Contract | New Orders peaked Feb ’21, in contraction | ✅ |
| Profit Growth Slows | S&P500 EPS down 30% from Oct ’22 Highs | ✅ |
| Markets Price In Fed Pivot | Markets may have pivoted and have created one lower high | ✅ |
| – Bonds Rally | Bond price in decline | ❌ |
| – Stocks Rally (P/Es Expand) | SP500 P/E index up 27% from May ’22 low, but looks like it’s rolling over. | ✅ |
| – Housing Activity Bounces | Housing market bounced, 80% up from Dec ’22 lows | ✅ |
| Expectations Rise For Soft Landing | Lots of press for soft landing | ✅ |
| Employment Contracts | Unemployment is off it’s low | ✅ |
| Recession Has Started | No recession announced | ❌ |
The narrative
The sequence of economic deterioration – as illustrated by the HOPE framework -begins with the housing sector, which is typically the first to react to higher interest rates.
As these rates climb, mortgage rates follow suit, which in turn makes home buying more expensive, reducing the demand for new homes.
Potential buyers may find themselves priced out of the market, and sellers might face longer selling times, possibly having to compromise on their asking prices.
This slowdown in the housing market is reflected in metrics such as the NAHB housing market index, new housing starts, and building permits, which have shown a decline.
Following the slowdown in housing, the next sector to feel the ripple effect is the order sector, as firms, anticipating a decrease in consumer spending due to higher living costs, begin to adjust their production.
They might reduce new orders to prevent inventory accumulation, a trend reflected in the ISM Manufacturing New Orders index which has been reported to fall steadily, indicating a decline in new orders from both firms and consumers.
As the reduction in orders begins to settle in, corporate profits start to feel the impact. Initially, companies might be able to sustain their profit levels by reducing costs or passing them on to consumers.
However, as consumer spending continues to slow down and both financing and production costs increase, corporate earnings begin to decline. This phase marks the beginning of a broader economic impact as firms might have to significantly tighten their belts, possibly laying off workers and abandoning expansion plans, which in turn has large repercussions on the rest of the economy.
Lastly, the employment sector reacts. This reaction comes only after significant economic slowdowns have occurred in the previous sectors.
Firms, now downsizing aggressively, contribute to an increase in unemployment rates.
It’s only after consumers have significantly cut their spending, house prices have been on a decline for a few months, and corporate profits have dwindled, that unemployment increases, wages and benefits slow down, and the broader economy feels the full brunt of the preceding economic downturns.
This sequential deterioration across the housing, orders, profits, and employment sectors as outlined by the H.O.P.E framework, encapsulates the lagged, yet intertwined, effects of rising interest rates on the economy, leading potentially to a recession.
Where are we?
At the moment, in the sequence, it’s looking like the indicators nearly all pointing to Recession.
This framework heavily supports the view we are going to have a recession. Let’s see if the bond market starts to rally (a result of FED cutting interest rates). At that point we’ll have a royal flush and the only thing left to tick off is the recession being announced.
This roadmap strongly indicates an upcoming recession ✅
Credit
We’re very grateful to Michael for introducing the H.O.P.E framework, which provides a structured lens through which to view and analyse the economic indicators leading up to a recession.
If you would like to show your appreciate, or keep up to date with Michaels thoughts, be sure to follow hime on Twitter and Linked in.