In 4-5 months, I expect the US to be in a recession.

A thread.

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— Alf (@MacroAlf) January 28, 2023

Predictions without a timeframe are useless and not actionable.

Now, it seems most analysts ‘‘expect a recession’’.

Ok, but when will it hit and how hard will it be?

The answers to these two questions are very important for asset allocation in 2023.

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— Alf (@MacroAlf) January 28, 2023

First of all: shall we agree on what characterizes a recession in the first place?

While many refer to 2 consecutive quarters of negative GDP growth as the main signal for a recession, the NBER instead looks at consumer spending, the labor market and corporate earnings.

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— Alf (@MacroAlf) January 28, 2023

GDP reports are delayed and often subject to big revisions.

The NBER methodology is more robust, and it allows us to assess live whether we are in a recession or not mostly looking at consumers, the labor market and earnings growth.

So: let's do that.

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— Alf (@MacroAlf) January 28, 2023

Here are 4 leading macro indicators that can help assess when and how hard a recession could hit.

#1: The Global Credit Impulse

When Recession? – March/April 2023
How Bad? – Bad

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— Alf (@MacroAlf) January 28, 2023

The global credit impulse (blue) leads S&P500 earnings growth (orange) by 9 months, and given its rapid decline in 2022 it’s now pointing to negative YoY EPS by March/April 2023

Rapid declines in the Global Credit Impulse have preceded YoY EPS contraction in the 10-20% area

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— Alf (@MacroAlf) January 28, 2023

#2: The Conference Board Leading Indicator Index

When Recession? – April/May 2023
How Bad? – On par with 2001 at least

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— Alf (@MacroAlf) January 28, 2023

This index incorporates the top 10 statistically significant forward-leading indicators for the US economy.

Over the last 50+ years, every time the YoY series of this index prints in negative territory for 2+ consecutive months a recession is guaranteed.

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— Alf (@MacroAlf) January 28, 2023

#3: The Housing Market

When Recession? – May 2023

How Bad? – Pretty bad, given unemployment rate is supposed to breach 7% by early 2024

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— Alf (@MacroAlf) January 28, 2023

In 2007 Edward Leamer of the University of California stated that the housing market IS the business cycle

I believe he is fundamentally right

Housing-related jobs and economic activity represent anything between 12-15% of US GDP and employment alone

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— Alf (@MacroAlf) January 28, 2023

The NAHB housing index (orange, inverted) leads trends in US unemployment rate (blue) by roughly 12 months

According to the Sahm Rule, a recession starts when the 3-month moving average of the US unemployment rate rises by 50+ bps relative to its low during the previous 12m

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— Alf (@MacroAlf) January 28, 2023

The survey goes out to 125 CEOs of relevant companies who tend to have a good grasp of where economic activity is headed.

Over the last 40 years, every time the 12m moving average of this index dropped below 15 for 2+ months, a recession always followed.

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— Alf (@MacroAlf) January 28, 2023

Conclusion: several leading macro indicators are pointing to a US recession starting in 4-5 months, and of a magnitude at least on par with 2001.

Looking under the hood, the latest GDP report also confirms organic growth is rapidly trending down and heading below zero.

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— Alf (@MacroAlf) January 28, 2023