No.   There is no recession in sight.    I’m of the opinion the financial market fear and anxiety was caused by Japan and not a budding recession.   Japan, you ask?  How can Japan tank the US financial markets?

Welcome to this week’s Steak House Index update.

If you are new to my blog, or you need a refresher on the SHI10, or its objective and methodology, I suggest you open and read the original BLOG: https://www.steakhouseindex.com/move-over-big-mac-index-here-comes-the-steak-house-index/

Why You Should Care:   The US economy and US dollar are the bedrock of the world’s economy.   But is the US economy expanding or contracting? Expanding ….  By the end of Q2, 2024, in ‘current-dollar‘ terms, US annual economic output rose to an annualized rate of $28.63 trillion.   After enduring the fastest FED rate hike in over 40 years, America’s current-dollar GDP still increased at an annualized rate of 4.8% during the fourth quarter of 2023.  Even the ‘real’ GDP growth rate was strong … clocking in at the annual rate of 3.3% during Q4.

According to the IMF, the world’s annual GDP  expanded  to over $105 trillion in 2023.   Further, IMF expects global GDP to reach almost $135 trillion by 2028 — an increase of more than 28% in just 5 years.

America’s GDP remains around 25% of all global GDP.  Collectively, the US, the European Common Market, and China generate about 70% of the global economic output.  These are the 3 big, global players.   They bear close scrutiny.

The objective of this blog is singular.

It attempts to predict the direction of our GDP ahead of official economic releases.  Historically, ‘personal consumption expenditures,’ or PCE, has been the largest component of US GDP growth — typically about 2/3 of all GDP growth.  In fact, the majority of all GDP increases (or declines) usually results from (increases or decreases in) consumer spending.  Consumer spending is clearly a critical financial metric.  In all likelihood, the most important financial metric. The Steak House Index focuses right here … on the “consumer spending” metric.  I intend the SHI10 is to be predictive, anticipating where the economy is going – not where it’s been.

Taking action:  Keep up with this weekly BLOG update.  Not only will we cover the SHI and SHI10, but we’ll explore “fun” items of economic importance.   Hopefully you find the discussion fun, too.

If the SHI10 index moves appreciably -– either showing massive improvement or significant declines –- indicating growing economic strength or a potential recession, we’ll discuss possible actions at that time.

The Blog:

OK, let me address the elephant in the room.   Wasn’t last Friday’s “employment report” really bad?   Wasn’t it so bad that economists everywhere started to declare the current economic expansion dead and FED rate cuts imminent?    With the unemployment rate soaring to 4.3% on Friday  —  from 3.5% just one year ago  — isn’t this a sign that the recession is here!!!!

Yes, that was the general consensus.  But no, that’s not what’s happening here.  Let’s look behind the headlines. 

Sure, the unemployment rate shot up to 4.3%.   But  not  because workers lost their jobs.   No, the unemployment rate jumped because the labor force grew at a rate that was faster than the job growth rate.   This is actually a good thing!   In July of 2023, when the rate was 3.5%, the US ‘civilian labor force’ (‘CLF)was about 167 million folks.   In July of 2024 — one year later — the CLF had grown to over 168.4 million, an increase of almost 1.4 million people.

But here’s what’s interesting:   The number of employed Americans in July of 2023 was  161,209,000.  In July of 2024, the number employed was  161,266,000.   Do the math.   257,000 more people were employed in July of 2024!  Yes, the unemployment rate is up — but not because workers lost their jobs.   The number of people working is UP!

So if the employment situation is fine, what triggered the fear response on Friday, that picked up steam on Monday?   Well, I suspect the ‘weak’ employment report definitely contributed to the fear response, but the culprit is actually a Bank of Japan (BOJ) ‘Governor’ named Kazuo Ueda.   Last week, Governor Ueda said the BOJ was planning to jack up Japanese interest rates.   On Wednesday, July 31st, the BOJ raised their “overnight” funds rate from zero to a whopping 0.25%.   This is significant because this BOJ “key rate” has been at zero for 17 years.  This is one reason, my friends, why the Japanese yen is sooooo cheap.  

And so Ueda’s comments, which came shortly after the 25 basis point hike, triggered a Japanese fear response amongst a very large group of global investors and traders who have been borrowing money in the Japanese Yen (with an almost zero cost) and investing those borrowed funds in stocks and bonds around the world.   This is called a “carry trade” and when Japan doesn’t raise rates for 17 years, the trade is very profitable.  But that profitability goes away quickly if Japan raises rates.  Which was threatened late last week. 

The fear of impending and sizable BOJ rate hikes triggered selling panic and a financial squeeze.    In the Japanese stock markets.   And elsewhere around the world.    Stocks plummeted.

Was this the only cause for fear?   No, of course not.    Everyone is worried about an AI bubble.   Many believe today’s stock P/E ratios are too high.   Inflation and the fact that the FED has yet to lower rates has everyone on pins and needles.   Pick your fear factor — any of these or others. 

But, again, we have to focus on the facts here at the SHI.   And the facts are this:   The US economic expansion continues unabated.   The American employment situation is fine — it’s not great, but it’s fine.  And the NY FED ‘nowcast’ and Atlanta ‘GDPnow’ estimate, for Q3 GDP growth, are still running hot at 2.9% and 2.5%, respectively.   And remember — these are ‘real‘ rates.   The current-dollar numbers are more than 2% higher!

Relax.   Trust the data.   Not the fear.

And you can trust the SHI, too!   This week, reservation demand is UP! 

That’s right, up.    After about two (2) months of ‘red ink’ this week’s SH10 reading is a positive 66!  People are ordering up steaks, my friends!  STEAKS ARE BACK, PEOPLE!

Well, no, I could be over-hyping here.   This week, steaks are back.   But, as I oft say, one week does not make a trend.  Here’s the longer term trend chart.

The OC is showing strong demand; demand in Dallas seems to have recovered this week, and even ‘Vegas and Philly are in the black.   This week’s SHI10 and definitely closely aligned with the Atlanta and NY FED forecasts.  

Does this mean everything is great?   Naaah.   As I’ve been saying for months now, the US economy is slowly slowing.   And the FED needs to begin rate cuts soon.   I remain optimistic for a September 25 bp cut.    For now, relax, pop the cork on your Cabernet, and grill up that T-bone.  

Life is grand. 

<::>  Terry Liebman