Also known as Alpha Beta Soup. “Student of markets, history and BTC” TXMC is an unnamed (undoxed) commentator on macro and crypto.
Whilst not a verified expert economist – in fact the opposite – his data analysis and charting is thorough and informed.
Bias toward recession ✅
The background
TXMC uses available data, usually from FRED, to analyse previous recessions. Looking at economic signals and when they happen in relation to a recession, the sequence below is a culmination of his efforts to plot the order of key events going in to, during and out of a recession.
They do not always appear in this order, each recession is unique, however, looking at the data back to 1920’s, this is broadly the order in which these indicators appear. We’ll keep these updated, so you don’t have to.
The metrics
| Sequence | Current Status | R? |
|---|---|---|
| New Orders Peak | Peaks Feb ’21 | ✅ |
| PMI peaks | PMI peaked Jan ’21 | ✅ |
| Housing Permits peak | Peaked Dec 2022 | ✅ |
| Yield Curve inversion starts | Yield Curve inverted | ✅ |
| Unemployment starts to come off its low | Unemployment off low Jul ’23 | ✅ |
| Earnings Peak | Earnings peaked Oct ’21 | ✅ |
| Market hits high | A high is in, but it might not be the high | ➖ |
| Tightening ends | Interest rates are high, but could go higher. | ➖ |
| Industrial production peaks | Possible Peak Sep ’22 | ➖ |
| CPI YoY Peaks | Peaked Sep ’22 | ✅ |
| New Orders Contractions start | Contracted through ’21-’22 | ✅ |
| PMI contraction starts | PMI contraction has started | ✅ |
| Real Sales Peaks | Continues to climb, no peak yet | ❌ |
| Recession Starts | No recession | ❌ |
| Yield Curve Inversion Ends | Yield curve is still inverted | ❌ |
| Real Income Peaks | Real income not peaked | ❌ |
| Easing Starts | Interest rates high, no printing. | ❌ |
| New Orders Trough | Potential low is in | ➖ |
| Market hits low | Market low nowhere to be seen | ❌ |
| PMI troughs | Potential bottom Apr ’23 | ➖ |
| Housing Permits Trough | Potential bottom is in Jan ’23 | ➖ |
| Industrial Production Troughs | Continues to climb higher | ❌ |
| Recession Ends | Not in one yet | ❌ |
| Real Sales Trough | No contraction yet | ❌ |
| Real Income Troughs | No contraction yet | ❌ |
| Unemployment Hits High | No highs | ❌ |
| Easing Ends | No easing begun | ❌ |
| Earnings Trough | Earnings not bottomed | ❌ |
| New Orders Contraction Ends | New orders going sideways | ❌ |
| PMI contraction ends | PMI has hit (potential) local lows | ➖ |
| CPI YoY Trough | In contraction | ❌ |
The narrative
When monetary tightening starts, it often happens as a response to perceived overheating in the economy. This curtails the availability of cheap credit, which then leads to peaks in new orders and PMI. Businesses, feeling optimistic yet cautious due to expensive credit, go all-in on production and hiring.
However, cracks start to show as yield curve inversion begins. Historically, an inverted yield curve has been a reliable, though not infallible, predictor of a recession.
When it starts, investors become more inclined to long-term bonds, signalling declining confidence in the short-term economy.
Around the same time, unemployment starts to come off its low, a likely consequence of businesses sensing an economic slowdown and becoming hesitant to hire or even starting to lay off workers.
These cautionary steps culminate in a peak phase where industrial production and consumer price inflation hit their maximum levels. The tightening of monetary policy concludes here, usually because central banks recognise signs of economic strain.
By this time, new orders and business activity as evidenced by the PMI, start contracting. The waning consumer confidence leads to a peak in real sales, often the last hurrah before a recession starts.
At this stage, the contraction is in full swing. Notably, the yield curve inversion ends, but by then, its warning is moot—the recession has already begun.
Real income starts to peak, most likely because people are either losing jobs or experiencing wage stagnation. Monetary policy shifts towards easing to try to breathe life back into the economic engine.
Markets hit lows and other indicators such as housing permits, PMI, and industrial production reach their troughs, marking the worst phase of the economic downturn.
As these indicators bottom out, it signifies the beginning of a new cycle. Real sales and income are at their nadir, but now they start to improve, marking a recovery.
Unemployment hits its high, often the lagging indicator confirming that the worst is over.
Monetary easing ends as the economy shows signs of picking up without the need for additional stimulus. Earnings and business activities also start to recover, closing the loop and setting the stage for the next cycle.
Where are we?
At the moment, in the sequence, we are quite clearly pre-recession.
However, many of the pre-recession (leading) indicators are turning green or are close to it.
The data, using TXMC’s method, is showing that we should in fact be biased in the direction of recession. Let’s see.
The leading indicators in this sequence have a strong bias towards recession ✅
Credit
TXMC’s generosity in giving away this information is the inspiration for this website.
All the hard work has been done by him, and we take no credit for any of this. Please follow him.