The US economy may be in the midst of a very long economic expansion because it is experiencing rolling recessions now, which reduce the chances of an economy-wide recession in the foreseeable future.
A rolling recession is a downturn that hits an industry or sector while the overall economy continues to grow. The oil industry fell into a rolling recession during the mid-1980s when the price of oil fell following the second oil crisis and price shock of 1979. That dragged down the economies of oil-producing states like Texas.
Let’s examine today’s rolling recessions:
(1) Energy industry. The oil industry did it again from mid-2014 through early 2016. It fell into a severe recession that coincided with the 76% plunge in the price of oil over this period. Amazingly, the oil-producing states remained remarkably resilient because they are more diversified now than they were during the mid-1980s. That’s evident in the downward trend in initial unemployment claims in the oil-producing states even during the latest oil industry recession (Fig. 1 and Fig. 2).
Most impressive is how rapidly the oil industry restructured its operations and financing to cut costs and shore up profitability. That can be seen in the remarkable roundtrip in the yield spread between high-yield corporate bonds and the US Treasury 10-year bond from 2014’s low of 253bps on June 23 to a high of 844bps on February 11, 2016, back down to 333bps on Friday of last week (Fig. 3). That was mostly due to the roundtrip in oil companies’ junk bond yields.
Also quite remarkable is that US oil field production only declined by 12% during the latest oil recession despite an 80% drop in the US active oil rig count (Fig. 4). Interestingly, the biggest rebound in oil production occurred in recent weeks in oil-producing states other than Texas and North Dakota (Fig. 5)!
(2) Retailing industry. The current rolling recession is hitting the brick-and-mortar retailing industry. Among the general merchandise stores, the department stores have been losing sales to the warehouse clubs and super-stores since the early 1990s (Fig. 6). However, in recent years, they have both lost market share to online retailers, who have doubled their share of total in-store and online “GAFO” sales (i.e., of department-store-type merchandise) from 15.0% during February 2006 to 29.5% during February (Fig. 7). Over this same period, the share of department stores fell from 20.0% to 12.4%, while the share of warehouse clubs and super-stores rose from 22.4% to 25.8%, though it’s been stuck around 26% since 2008. Payroll employment at general merchandise stores peaked at a record high of 3.2 million during October 2016, and is down 90,000 since then through March (Fig. 8).
(3) Auto industry. The auto industry may be next in line for a rolling recession. Motor vehicle sales are down 10% from a cyclical peak of 18.4 million units (saar) at the end of last year to 16.6mu during March (Fig. 9). The immediate problem seems to be that lenders are tightening auto loan terms as delinquencies increase, particularly among subprime auto loans. Exacerbating the problem for lenders is that used car prices continue to decline, with the personal consumption expenditures deflator for used cars down 3.8% over the past six months through March (Fig. 10).
According to the FRB-NY, delinquent auto loans have reached levels not seen in over eight years. Auto loan delinquencies of 30 days or more reached $23.27 billion, the highest since the $23.46 billion registered in Q3-2008. The seriously delinquent fraction of these loans, defined as those at least 90 days past due, reached $8.24 billion. The delinquency level is only at 3.8%, a small fraction of the $1.16 trillion in total outstanding auto loans. But the Fed’s latest survey of senior loan officers showed that they tightened lending terms somewhat during Q4-2016.
US Strategy: Seasonal Earnings Hook. The rolling recession in the oil industry certainly roiled S&P 500 operating earnings, which declined on a y/y basis from Q3-2015 through Q2-2016, based on Thomson Reuters data. Last summer, Joe and I declared that the energy-led earnings recession was over. So far so good: S&P 500 earnings rose 4.2% and 5.9% y/y during Q3- and Q4-2016.
We are starting to see the typical earnings hook during the current earnings season for Q1-2017 (Fig. 11). The blend of actual and estimated earnings numbers was up 11.5% y/y last week versus a low of 9.2% at the start of last month, when the earnings season began (Fig. 12).
Industry analysts currently expect S&P 500 operating earnings to rise 11.1% this year and 12.1% next year (Fig. 13). Next year’s estimate has been remarkably stable since last September around $150. Forward earnings for the S&P 500/400/600 all are at record highs (Fig. 14).
In other words, the energy-led earnings recession has given way to a broad-based earnings recovery. The forward earnings of most of the 11 S&P 500 sectors are at either record highs or cyclical highs (Fig. 15).
Dr. Ed Yardeni is the President of Yardeni Research, Inc., a provider of independent global investment strategy research.
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