I know I’m aging myself here, but I’ve had the dubious fortune of covering three U.S. and two Canadian recessions in my professional career. One thing I’ve learned about them is that once the economic pundits are debating whether they see smoke, the fire may have already begun.
With that in mind, and not to alarm anyone, but the smoke-debaters are suddenly all over the place.
Anecdotally, the topic of recession has become a routine feature of the steady stream of economists’ and market strategists’ reports that fill my e-mail inbox. Slightly more scientifically, a quick content analysis shows that since the beginning of the year, 96 stories published in The Globe and Mail’s print edition have contained the word “recession.” In the same period a year ago, the number was just 50.
Try googling the word “recession,” and then look at the news headlines. On Wednesday, a wide range of prominent news sources – The New York Times, The Times of London, Bloomberg, CNBC, Forbes, Barron’s, CBC – all had new stories discussing the probability and timing of a recession. Global recession, China recession, Alberta recession, Italy recession, U.S. and Canadian recessions – all are up for discussion.
Merely saying the word “recession” hardly means one is imminent; indeed, many commentators are kicking the word around expressly to dismiss it. But the mere fact that this is a topic of debate, even to argue in opposition, is evidence of the growing fears.
While recent unimpressive economic data and a sudden rise in caution at the Canadian and U.S. central banks have sparked the recession musings, last week’s U.S. retail sales report seriously fanned the flames. Sales slumped 1.2 per cent in December from November, the worst one-month slide since 2009 – which, you might recall, was a period of recession.
Gluskin Sheff + Associates chief economist David Rosenberg – who has a reputation as a pessimist, but also a reputation for being right, famously for foreseeing the 2008-09 recession – said the retail numbers contained more than a few red flags. He said the drop in sales of necessities – groceries and pharmacy purchases – is “cause for concern.” He noted that restaurant sales, which he called “a leading indicator," have fallen in four of the past five months, “at a pace we haven’t seen in 25 years.”
Yet more optimistic economists dismissed the December sales figures as an anomaly. Several even suggested that the retail data could be in error, owing to the U.S. government shutdown that may have hampered data collection for the period.
“There are a lot of ostriches out there,” Mr. Rosenberg countered in a research note.
Regardless, the lousy finish to 2018 suggests that the Canadian economy may have only grown at about a 1-per-cent annualized pace in the fourth quarter, and the first quarter looks likely to similarly slow. The weak U.S. data, particularly the troubling consumer numbers, now have economists wondering whether growth south of the border is running much better – estimates in the 1-per-cent-to-1.5-per-cent range have started to surface for the first quarter.
As Canadian Imperial Bank of Commerce chief economist Avery Shenfeld points out in a recent report, “Being in the 1-per-cent club means that it wouldn’t take too much to tip the economy over.”
Mr. Shenfeld argues that the saving grace amid the recent disappointing data is the labour market. Employment in the U.S. jumped by 304,000 jobs in January, while Canadian employment surged by 67,000 positions, both much bigger than expected.
“One thing is clear – the start of a recession is marked by a string of job declines, and we haven’t seen that in either the U.S. or Canada,” he said.
Craig Basinger, chief investment officer at Toronto investing firm Richardson GMP Ltd., suggests we might want to keep our eye out for something we’re likely to see in advance of such a job downturn: shrinking corporate profit margins.
“Once margins begin to squeeze, companies start doing things like ‘hiring freezes’ or cutting back on other spending,” Mr. Basinger wrote in a report this week. “If enough companies start doing this, you can easily see how this would quickly feedback across the economy and slow growth more. Next thing you know it’s a recession.”
The kind of margin squeeze Mr. Basinger is talking about typically occurs when demand starts to slip at the same time as business costs are rising. He notes that the cost side has certainly kicked in – key elements such as wages, transportation costs and interest rates have been on the rise. So far, though, revenue growth has managed to keep pace.
But we are starting to see evidence of slowing profit growth in the fourth-quarter corporate earnings numbers – perhaps early signs that slowing consumer demand is cutting into profit margins. It bears watching. If this trend takes hold, Mr. Rosenberg might find more company on his side of the recession debate.
David Parkinson