MetLife Invest… - Wed, 11/29/2023 - 22:20

Economy Monthly – Labor Market: On the Precipice?

  1. The Sahm Rule of unemployment surpassed 0.3% in October, potentially foreshadowing a recession.
  2. Default rates are expected to worsen in the first half of 2024.
  3. Is consumer spending as strong as it looks?

Is the Labor Market Signaling a Recession?

The unemployment rate has been creeping up gradually since July, reaching 3.9% this past October according to the BLS. The Sahm Rule indicator measures the difference between the 3-month moving average of the unemployment rate and the minimum of that average over the last 12 months. Traditionally, this difference surpassing a threshold of 0.5% is considered indicative of a recession, but looking backwards gives many historical examples where a recession (as later determined by the NBER) has already started by the timethe Sahm Rule passes 0.5%. In October, the Sahm Rule indicator broke 0.3%, which is a“yellow flag” that indicates potential momentum in unemployment increases and a possible recession. The indicator has been rising steadily since April 2023.

The Sahm Rule Indicator has been Rising Steadily Since April

Source: BLS, Haver, MIM While it’s true that unemployment is still at historically low levels, the magnitude of increase is more relevant to consumers who may cut spending in the face of job losses than the low starting point.

Default Rates Expected to Worsen Before They Get Better

October 2023’s Senior Loan Officer Opinion Survey (SLOOS) showed stabilizing lending standards over the third quarter, with the majority of credit standards unchanged from the prior quarter. At the same time, in absolute terms standards remain tight at recessionary levels, and banks are concerned about a less favorable or more uncertain economic outlook and have a reduced tolerance for risk. The survey also reveals differences between small banks and large banks. Larger banks report less tightening of C&I lending standards compared to small banks, which are more concerned about deposit outflows, lack of liquidity, and the falling market value of fixed-income assets.

SLOOS Predicts Higher Default Rates

Source: Moody's, Federal Reserve, MIM Most importantly, the SLOOS is an important leading indicators for default rates (see Figure 1). We use the SLOOS in our credit cycle default model, and the latest survey suggests that default rates may increase into the first half of 2024 but then start to improve by the second half of the year. The SLOOS alone implies a 1-year forward default rate of about 7%, but we do not believe that default rates will rise that much as 2024 maturities are at a very manageable level.

Seasonality and Inflation Blurring the Retail Sales Picture

The U.S. retail sales headline estimate, which is adjusted for seasonality but not inflation, rose 0.7% in September from the prior month, marking the sixth-straight month of growth, according to the U.S. Census. Sales gains were broad-based in September, with the largest expansion of 3% in miscellaneous store retailers.

Consumers Not As Strong?

Source: Census, MIM The seemingly positive picture flips when examining real, non-seasonally adjusted retail sales (see Figure 2). The year to date growth for August and September 2023 show a decelerating growth trend since its peak in 2021. The picture overall suggested that the U.S. consumer is not quite as strong as thought. Looking forward, future retail sales reports may continue to show signs of weakening as consumers face high credit card balances, higher-for-longer interest rates, and tightening lending standards.

Risks to the Outlook

Similar to last month, we continue to see at least two mitigating factors that work against our call for a recession in the first part of 2024. First, even though consumer spending may not be as strong as it looks on the surface (as we discussed in this Monthly), consumers continue to spend in absolute terms and the holiday season is likely to cushion near term spending pullbacks. Second, President Biden’s industrial policy bills boosted GDP in 2023, and these have the potential for a further stimulus effect given that spending is expected to ramp up further next year.

U.S. Outlook Summary

Our overall outlook remains roughly similar to last month’s. We continue to expect that a recession will occur in 2024, and we do not expect another interestrate hike from the Fed in the December meeting. However, we have revised our 10-year forecast for 2024 upwards to 4.00%. Currently, rates are higher than supported by economic fundamentals, and under the assumption of a 2024 recession, we expect rates to drift down from their current high levels. 

mim

Additionally, we expect 150bps of cuts next year, to bring the upper bound of the policy rate to 4.00% by the end of the year. As inflation comes down, the real rate is expected to increase and the Fed would need to cut just to keep real rates stable. Then, additional cuts can be attributed to the assumption of a recession. Lastly, we revised downward our unemployment rate for the end of 2024 to 4.6. Given our call for a recession in the first half of the year, we expect unemployment to peak (potentially at a level higher than 4.6%) and then start to recover by year-end. Read More From MetLife Investment Management Disclaimer This material is intended solely for Institutional Investors, Qualified Investors and Professional Investors. This analysis is not intended for distribution with Retail Investors. This document has been prepared by MetLife Investment Management (“MIM”)1 solely for informational purposes and does not constitute a recommendation regarding any investments or the provision of any investment advice, or constitute or form part of any advertisement of, offer for sale or subscription of, solicitation or invitation of any offer or recommendation to purchase or subscribe for any securities or investment advisory services. The views expressed herein are solely those of MIM and do not necessarily reflect, nor are they necessarily consistent with, the views held by, or the forecasts utilized by, the entities within the MetLife enterprise that provide insurance products, annuities and employee benefit programs. The information and opinions presented or contained in this document are provided as of the date it was written. It should be understood that subsequent developments may materially affect the information contained in this document, which none of MIM, its affiliates, advisors or representatives are under an obligation to update, revise or affirm. It is not MIM’s intention to provide, and you may not rely on this document as providing, a recommendation with respect to any particular investment strategy or investment. Affiliates of MIM may perform services for, solicit business from, hold long or short positions in, or otherwise be interested in the investments (including derivatives) of any company mentioned herein. This document may contain forward-looking statements, as well as predictions, projections and forecasts of the economy or economic trends of the markets, which are not necessarily indicative of the future. Any or all forward-looking statements, as well as those included in any other material discussed at the presentation, may turn out to be wrong. All investments involve risks including the potential for loss of principle and past performance does not guarantee similar future results. Property is a specialist sector that may be less liquid and produce more volatile performance than an investment in other investment sectors. The value of capital and income will fluctuate as property values and rental income rise and fall. The valuation of property is generally a matter of the valuers’ opinion rather than fact. The amount raised when a property is sold may be less than the valuation. Furthermore, certain investments in mortgages, real estate or non-publicly traded securities and private debt instruments have a limited number of potential purchasers and sellers. This factor may have the effect of limiting the availability of these investments for purchase and may also limit the ability to sell such investments at their fair market value in response to changes in the economy or the financial markets. In the U.S. this document is communicated by MetLife Investment Management, LLC (MIM, LLC), a U.S. Securities Exchange Commission registered investment adviser. MIM, LLC is a subsidiary of MetLife, Inc. and part of MetLife Investment Management. Registration with the SEC does not imply a certain level of skill or that the SEC has endorsed the investment advisor. This document is being distributed by MetLife Investment Management Limited (“MIML”), authorised and regulated by the UK Financial Conduct Authority (FCA reference number 623761), registered address 1 Angel Lane, 8th Floor, London, EC4R 3AB, United Kingdom. This document is approved by MIML as a financial promotion for distribution in the UK. This document is only intended for, and may only be distributed to, investors in the UK and EEA who qualify as a “professional client” as defined under the Markets in Financial Instruments Directive (2014/65/EU), as implemented in the relevant EEA jurisdiction, and the retained EU law version of the same in the UK. For investors in the Middle East: This document is directed at and intended for institutional investors (as such term is defined in the various jurisdictions) only. The recipient of this document acknowledges that (1) no regulator or governmental authority in the Gulf Cooperation Council (“GCC”) or the Middle East has reviewed or approved this document or the substance contained within it, (2) this document is not for general circulation in the GCC or the Middle East and is provided on a confidential basis to the addressee only, (3) MetLife Investment Management is not licensed or regulated by any regulatory or governmental authority in the Middle East or the GCC, and (4) this document does not constitute or form part of any investment advice or solicitation of investment products in the GCC or Middle East or in any jurisdiction in which the provision of investment advice or any solicitation would be unlawful under the securities laws of such jurisdiction (and this document is therefore not construed as such). For investors in Japan: This document is being distributed by MetLife Asset Management Corp. (Japan) (“MAM”), 1-3 Kioicho, Chiyoda-ku, Tokyo 102-0094, Tokyo Garden Terrace KioiCho Kioi Tower 25F, a registered Financial Instruments Business Operator (“FIBO”) under the registration entry Director General of the Kanto Local Finance Bureau (FIBO) No. 2414. For Investors in Hong Kong S.A.R.: This document is being issued by MetLife Investments Asia Limited (“MIAL”), a part of MIM, and it has not been reviewed by the Securities and Futures Commission of Hong Kong (“SFC”). MIAL is licensed by the Securities and Futures Commission for Type 1 (dealing in securities), Type 4 (advising on securities) and Type 9 (asset management) regulated activities. For investors in Australia: This information is distributed by MIM LLC and is intended for “wholesale clients” as defined in section 761G of the Corporations Act 2001 (Cth) (the Act). MIM LLC exempt from the requirement to hold an Australian financial services license under the Act in respect of the financial services it provides to Australian clients. MIM LLC is regulated by the SEC under US law, which is different from Australian law. MIMEL: For investors in the EEA, this document is being distributed by MetLife Investment Management Europe Limited (“MIMEL”), authorised and regulated by the Central Bank of Ireland (registered number: C451684), registered address 20 on Hatch, Lower Hatch Street, Dublin 2, Ireland. This document is approved by MIMEL as marketing communications for the purposes of the EU Directive 2014/65/EU on markets in financial instruments (“MiFID II”). Where MIMEL does not have an applicable cross-border licence, this document is only intended for, and may only be distributed on request to, investors in the EEA who qualify as a “professional client” as defined under MiFID II, as implemented in the relevant EEA jurisdiction. The investment strategies described herein are directly managed by delegate investment manager affiliates of MIMEL. Unless otherwise stated, none of the authors of this article, interviewees or referenced individuals are directly contracted with MIMEL or are regulated in Ireland. Unless otherwise stated, any industry awards referenced herein relate to the awards of affiliates of MIMEL and not to awards of MIMEL. 1 MetLife Investment Management (“MIM”) is MetLife, Inc.’s institutional management business and the marketing name for subsidiaries of MetLife that provide investment management services to MetLife’s general account, separate accounts and/or unaffiliated/ third party investors, including: Metropolitan Life Insurance Company, MetLife Investment Management, LLC, MetLife Investment Management Limited, MetLife Investments Limited, MetLife Investments Asia Limited, MetLife Latin America Asesorias e Inversiones Limitada, MetLife Asset Management Corp. (Japan), and MIM I LLC, MetLife Investment Management Europe Limited, Affirmative Investment Management Partners Limited and Raven Capital Management LLC.

CLICK HERE TO READ PAPER

Sign Up Now for Full Access to Articles and Podcasts!

Unlock full access to our vast content library by registering as an institutional investor .

Create an account

Already have an account ? Sign in