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1. This Indicator Is Flashing A Warning Sign For The U.S. Labor  

  • The Kansas City Fed Labor Market Conditions Indicators (LMCI) suggest the labor market further weakened. 
  • Historically, this is a canary in the coal mine.

What you need to know: In April, the Kansas City Fed's Labor Market Conditions Indicators (LMCI)1 – aka the two labor market indicators that gauge both current labor activity and the momentums - showed a decrease in overall activity and a moderate increase in downward momentum in the U.S. job market. Activity levels have been gradually declining since summer 2023, reaching readings last seen in mid-2021 during the initial post-pandemic recovery.

Why it matters: That further decline came as job gains slowed to 175,000 during the month, the unemployment rate ticked up slightly, and average weekly hours nudged down. And these indicators imply that the U.S. labor market may continue to soften.

Now the Dunham Deep Dive: The Kansas City Fed’s LMCI is historically a leading indicator for the overall health of the U.S. labor market.

In short, when the LMCI declines, the unemployment rate increases. And vice versa (see my chart below).

But keep in mind, there are two important things to note here:

  • The LMCI is a leading indicator (meaning indicators that change before general economic conditions, which can help predict turning points in the business cycle).
  • Whereas the unemployment rate is a lagging indicator (meaning it moves only after macroeconomic conditions have changed).

To put this into perspective, a leading indicator is what will drive lagging indicator - aka by the time the unemployment rate rises, it’s already from old data just now showing up (a delay).

This is why it’s important to follow leading indicators as they set the momentum for where the economy is headed.

Or as Wayne Gretzky – the famous hockey player – once said: "Skate to where the puck is going to be, not where it has been."

Thus, according to this leading labor indicator, expect unemployment to keep rising.

St. Louis Federal Reserve, May 2024

2. Stalling Out: China's Credit Engine Reverses – Marking The First Decline in Almost Two Decades

  • Chinese consumers and businesses appear tapped out - Government highlights fiscal stimulus as loans “unexpectedly” decrease. 
  • The PBOC (China’s central bank) may cut interest rates again to try and spur borrowing – which could devalue the Chinese yuan further.

What you need to know: China's “unexpected” credit contraction is increasing pressure on the government to increase spending and on the central bank to assist. The recent drop in aggregate financing (the widest credit measure in China) was the first in nearly twenty years. As private borrowers and local governments have limited borrowing capacity at this point, the central government announced plans to sell 1 trillion yuan ($138 billion) in ultra-long special bonds to fund infrastructure investments, starting this Friday2.

Why it matters: The People's Bank of China has space to reduce borrowing costs (cut interest rates), which most analysts anticipate it will do, despite this potentially putting downward pressure on the yuan (which is already trading at multi-year lows). However, previous monetary easing efforts have not halted the property market downturn, now in its third year. Falling home prices and a sluggish job market have left households reluctant to increase debt, regardless of how inexpensive it may be (as the chart below shows).

Now the Dunham Deep Dive: I'm not sure why so many experts were “surprised” by the plunging credit data in China. China’s economy has been running out of steam for months as the authorities were stuck pushing on rope.

So, what’s going on with China? Well, as I wrote to you back in November 2023, China is essentially stuck in what’s known as a “balance sheet recession” (read here).

  • Putting it simply, a balance sheet recession – a term coined by economist Richard Koo - refers to an economic situation where the main problem affecting an economy is the excessive debt burden of households and businesses. Because of this, cutting interest rates (the main policy tool of central bankers) won’t work in helping the economy as borrowers continue avoiding more debt.

Sound familiar? This is what’s happening in China (as the latest credit data highlights). And I believe this is creating a doom loop – For example:

  1. Borrowers reach debt limits and avoid taking on new debt.
  2. Less credit extended is synonymous with less demand (someone uses debt to buy something now, right?).
  3. Less demand means lower prices.
  4. Lower prices mean corporate margins are crushed and layoffs occur. It also means asset prices sink relative to debt (aka imagine your home price falling 10-20% while the mortgage you took out only grows).
  5. Interest rates keep falling as the economy deteriorates, which puts pressure on the Chinese yuan and savers, further reducing confidence.

And on and on.

Making matters worse, the recent credit decline adds to a series of disappointing data releases - including weak consumer inflation, declining producer prices, and a significant drop in foreign direct investment into China over the last quarter.

It’s gotten so bad that Beijing is now considering3 having the government buy unsold homes to try and prevent property prices from falling further (the idea being that some sort of buying must happen to absorb the excess supply before it tips the housing market into further decline).

Meanwhile, Chinese banks are sitting on a record-high amount of bad loans – a whopping three-plus trillion yuan worth (roughly $415 billion).

Things do not look good in China. And I will write more on this in the coming weeks.

Stay tuned. . .

Bloomberg, May 2024

3.  Stagnating Along: U.S. Industrial Production Looks Weak with a Decline in Factory Output 

  • In April, US industrial production stagnated, mainly due to a decline in factory output, indicating a manufacturing sector facing challenges in gaining momentum. 
  • Manufacturing, which comprises three-fourths of total industrial production, has faced challenges in gaining momentum due to increasing input costs and fluctuating demand.

What you need to know: Production across factories, mines, and utilities remained unchanged following a downwardly revised 0.1% gain in the previous month, according to Federal Reserve data released on Thursday. Manufacturing output declined4 by 0.3% (vs. estimates of a 0.1% increase) which was primarily influenced by a drop in motor-vehicle production (unsurprising). This is on the back of the downward revisions in March.

Why this matters: US producers are facing challenges from sluggish export markets and increased borrowing costs, which are limiting capital spending in the economy. Although factory customers have made efforts to align stockpiles with demand over the past year, recent government figures indicate that retail sales stagnated in April, following downwardly revised gains in the previous two months.

Sal Guatieri, senior economist at BMO Capital Markets, noted5 that US economic data have consistently fallen below expectations recently, suggesting a “loss of momentum in the economy” due to restrictive monetary policies

Now the Dunham Deep Dive: The U.S. manufacturing base is looking relatively anemic amid weakening demand – especially for business equipment and vehicles.

Domestically there are some issues causing this – such as a softer employment market and anemic “real” (inflation-adjusted) retail sales.

But the key point here I believe ties back into the brewing trade war. . .

For starts, the U.S. dollar is staying very strong – with the $DXY (the U.S. Dollar Index) up 3.10% year-to-date6 – and up 16% since this time three years ago.

  • The stronger U.S. dollar makes U.S. exports less competitive abroad because it pushes up U.S. import costs (for example, anyone in Turkey would need to use more Lira to convert to dollars, which makes it costlier to import U.S. goods). But this also works vice versa (because the Lira is cheaper than the dollar, it makes Turkish goods more attractive to export as U.S. buyers can get more bang-for-the-buck).

Another thing to note is that U.S. auto production took a hit – likely due to increased competition from foreign exports trying to out-compete one another.

I’ve written about this brewing global trade threat before if you missed it (read here). But the gist is that as foreign markets – like China and Japan – have their currencies fall, their auto exports are more attractive. Which then implies fewer sales for U.S. automakers.

Now, it’s hard to envision U.S. automakers sitting idly by while losing market share. So don’t be surprised if they lobby politicians for bigger subsidies, etc. to try and shield them.

Thus, I believe this is a big trend worth monitoring - especially as U.S. subprime auto loans reach dangerous levels – those last not seen since 2008 or even worse7.

I’ll continue monitoring. . .

Bloomberg, May 2024

Anyways, who knows what will happen? Maybe this is just noisy data.

As usual, just some food for thought.

Have a great rest of your weekend.










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