Rare Recession Indicator Is ‘Screaming’—No One’s Paying Attention | Jeff Snider

Jeff Snider (0:00)

We throw an energy shock on top of a fragile economy, and it's a pretty dangerous mix.

Energy costs go up, something has to give. Consumer spending pulls back, you've got weaker marginal companies that have to cut back because they're getting a margin squeeze, input costs go up. Can't pass those costs on the customers. There's a reason why energy shocks usually go before a recession, is because you've got a fragile economy that encounters prices that it can't really absorb and afford, and eventually it leads to the downward spiral. The Fed is likely to continue hiking rates, but inevitably the Federal Reserve will continue going until it can't go anymore. And when it doesn't go anymore, it's usually because the economy has fallen off and the Fed has finally figured out. There wasn't a resilient situation, instead it was indeed fragile as the market's been pricing.

David Lin (0:42)

You've all seen bond yields surging. Just today, for example, on Friday, September 25th, the US 30-year Treasury yield reached its highest level since 2004 The 10-year hit 5.21%, its highest since 2007, and mortgage rates are back above 7%.

And the Fed is considering yet another hike. This is all becoming a much bigger problem than most people believe. And our next guest is going to explain exactly why and show us the top economic growth indicators that he's following and what's ahead for the consumer.

Speaking of the consumer, well, most of the indicators that we're going to talk about today point to weakness ahead, but at the same time, new data shows consumer confidence weakening while inflation expectations are rising, while business equipment orders are increasing. Unemployment claims remain low, but our business is still hiring or simply holding on to existing workers. The Trump-Xi summit this week brought a Trade Truce extension, but that doesn't necessarily mean that underneath the surface, major economic disputes are all resolved. Jeff Snider joins us today. You probably know him from Eurodollar University on YouTube. He's got a great channel. Welcome to the show, Jeff. Good to see you.

Jeff Snider (1:57)

Yeah, thanks, David. Good to see you too.

David Lin (1:59)

Jeff, you have a great channel. I encourage everyone on the show to watch my screen right now. I encourage everyone to check out Eurodollar University right now. Monetary Science Reborn is a description. That's really cool. And here's you in a James Bond outfit.

Well, we can shoot at the biggest risks at the economy right now. What do you think is right now facing the economy that you would consider the highest risk for growth or markets overall?

Jeff Snider (2:31)

Oh, no question. It's energy prices. You've got an economy that, you know, everybody says it's resilient because the lack of negative numbers makes it seem like, you know, we're only given really two choices for economic analysis. Either the economy is falling off 2009 style or everything is just fine. And the truth is, there's always gradations to various situations. So, you know, get the economy that wasn't doing great to begin with, you know, job losses, rising shadow unemployment, that kind of thing. And then along comes an energy shock where gasoline prices shoot up, you know, 450 heading toward $5 a gallon. Diesel, I'm sure everybody knows, diesel prices are at record highs. So you throw an energy shock on top of a fragile economy, and it's a pretty dangerous mix.

So, you know, it's not an inflationary situation so much as, you know, we can't afford to fill up, you can't fill up for to fill up on gasoline. So you have to pull back discretionary spending from other places, which you're kind of seeing already, more anecdotal at this point than necessarily in evidence, though, and hard data evidence. So the hard data kind of got to keep in mind when you're looking at hard data, it's always an average, not necessarily, not necessarily all the time, but the kind of granularity and detail that you want. But basically, big picture terms, you've got an economy that was in a rough shape to begin with, just ask any consumer survey, and they'll show you exactly the same thing.

Energy costs go up, something has to give, consumer spending pulls back, you've got weaker marginal companies that have to cut back because they're getting a margin squeeze, input costs go up, can't pass those costs on the customers. So the labor market gets pressured even more. And the big risk, therefore, is the traditional energy shock classic recession case. There's a reason why energy shocks usually go before recession is because you've got a fragile economy that encounters prices that it can't really absorb and afford, and eventually it leads to the downward spiral where job losses or even just hours lost, income starts to dry up, consumers pull back, which convinces businesses to cut back even further on labor when round and round you go.