Transcription
This line that you see right here has jumped right before every single economic recession in the United States since the 1980s. This is data from the Conference Board's Consumer Confidence Survey, and it shows us how consumers feel about the future of the job market. More specifically, it tells us the exact percentage of people that are expecting fewer jobs to be available in the economy over the next 6 months. And today, around 30% of respondents said they expected fewer jobs to be available in the next 6 months. Historically, every single time we've seen a reading above 30% on this survey, it happened either right before a recession started or right at the onset of one.
But at the same time as we're seeing this pessimism on the job market, the unemployment rate is still sitting at 4.2%. Which, according to the Federal Reserve, should correspond to full employment. So, in other words, consumers believe that unemployment is going to rise substantially from current levels within the next 6 months. and we 100% agree with them, but it won't be happening within the next 6 months.
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Now, to a lot of people, things seem different today because the current administration is not backing away from its tariff policy. And most people agree that these are going to have a negative impact on the economy. But the question is, how big of a negative impact will tariffs actually have? And is it enough to push the economy into a recession within the next 6 months?
In order to answer that question, we first need to evaluate the current state of the job market. Are jobs plentiful, or is it already hard for someone who is unemployed to find a job? If jobs are very plentiful, it's unlikely that a recession is going to happen straight away. If the job market is already in a difficult state, then it's much more likely that the economy can get pushed into an actual downturn.
A great way to look at this is by looking at the ratio of official job openings in the US versus the number of people that are unemployed and currently looking for a job. It literally shows us the supply versus the demand in the job market. And this is what the ratio looks like. Currently, the number of job openings versus the number of people unemployed stands precisely at one. Now, that is considerably weaker than what it was a couple of years ago, but it is still at one of the highest levels since 2000. For context, in 2001, the recession began below a ratio of 1, and the 2008 recession began at a ratio of 0.6.
Although the job market is not in a catastrophic shape today, it is somewhat vulnerable to being pushed over the edge where there are more people looking for jobs than actual job opportunities. So, it is understandable that many are fearing the economic shock from tariffs will tip the scale towards a weaker labor market and push the economy into a recession. But again, we're not 100% convinced that tariffs are actually going to produce that result within the next 6 months.
You see, tariffs are essentially a tax on US corporations. And so, there are two ways that US corporations can react to these tariffs. They can either pass on the cost to the consumer by raising prices or they can absorb the cost which would inevitably lead to lower profit margins. Now, of course, some firms are going to try and pass on the cost to consumers, but in general, we don't think they're going to be very successful at it. Consumer confidence today is at one of the lowest levels going back to the 1950s. And at the same time, the delinquency rates on consumer loans have just hit 10-year highs. So, simply put, the consumer in the United States today is very weak, and is definitely not able to absorb the cost from tariffs.
But the good news is that although consumers are not able to absorb the shock from tariffs, corporations are absolutely able to. Corporate profit margins in the US remain at record highs. And even a 10 to 20% hit to corporate profit margins as a result of tariffs would still leave them more profitable than any other point over the last 20 years. If we look at prior economic recessions in the United States, we see on average a 19% drop in corporate profit margins in the year before the recession starts. Right now, we haven't seen any contraction in profit margins yet.
This right here is another index from the Conference Board that measures CEO expectations around capital spending, hiring, and their economic outlook. And the most recent reading shows 64% of CEOs anticipate the economy to worsen over the next 6 months. Now, you would expect CEOs to have a more accurate outlook into the future of the economy given that they actually manage the companies that ultimately decide whether or not to lay people off. So, let's take a look at that. The last four times that CEO confidence was this low was in late 2022, in early 2020, in early 2009, and in early 2001. If we take a look at a chart of the US stock market to see what happened following those readings, we see that three out of the four readings of low consumer confidence were actually followed by significant upside in the US stock market. It seems that quite often the very moment that CEOs get pessimistic is the moment that things actually turn around and start looking up for the US economy.
The truth is corporations do still have a lot of buffer here before companies feel like they need to begin actually laying people off to stay profitable. Of course, it could be that this changes quite quickly. If tariffs are fully implemented and sustained, they will gradually eat into the profit margins of these corporations, and eventually that's going to lead them to cut costs in order to keep their profits and so lay workers off and start a recession.
In conclusion, we happen to think that fears from consumers and CEOs are premature. Although the consumer is very vulnerable today, corporate profit margins being at all-time highs means we won't necessarily be seeing layoffs straight away as a result of tariffs. Of course, it could be that we're completely wrong about all of this. If the data changes, it could very much be that we need to adjust our opinion on no recession happening in 2025. But right now, we think a resilient economy can mean a resilient stock market.
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