Are we already in a recession?
While most investors expect that a recession will come in 2023, we believe that we are already in a recession. We will go into more details about each subsector in our next week's 2023 Outlook, but in short there are several sub-sectors that we consider to be "canaries in the coal mine". Those are:
- Consumer discretionary
- Trucking
- Commodities
- Semiconductors
All four experienced major slowdown in May/June and the main driver was excess inventory. Over the summer demand stabilized at a lower level, but the latest Fed rate increase (10Y>3.5%) resulted in a significant step down post Labor Day.
Our channel checks and conversations with management teams indicate that the impact of higher rates and recession fears has now broadened from select industries to most end markets, resulting in a spending freeze.
The key question that we are trying to solve is if sentiment is actually worse that end-demand. It is common in recessions that sentiment will precede demand, but we are now seeing inventories (in several commodities) depleted below normal levels (recessions are generally characterized with oversupply).
Below is an example of copper inventories at the LME: 
We believe that industrial activity, while weakening with interest rates and lack of capital availability, still has significant support from re-shoring. As an example, earlier this week, TSMC announced a second plant in Arizona, tripling its investment in the US to $40bn. To put this in context, the entire US annual equipment manufacturing CAPEX is slightly over $200bn.
Consequently, we expect that this recession will likely be focused on the consumer, while industrials are likely to hold up better.