Listen, we can all be happy that the economy has been more resilient than expected this year. But I'm surprised to see so many people cheering on the slowdown that is now taking place.
"Dream JOLTS data!" wrote one trading desk after the job openings survey showed way fewer open positions than expected last week. "Soft Landing Summer" was the title of Goldman's note this morning saying their 12-month recession odds have now fallen by 5 points to just 15%. And, "That was a hell of a good week of data we had last week," Fed Governor Christopher Waller said to our Steve Liesman this morning.
Sara Eisen's tweet put it best: "I guess 'good week of data' for the Fed is bad data on the economy," she wrote, pointing out that aside from the big miss in job openings, consumer confidence fell by the most in two years; the unemployment rate jumped three-tenths to 3.8%; and the Dallas Fed's regional manufacturing survey fell to negative 17.2.
And that's not all; Challenger reported that job cut announcements surged to more than 75,000 in August, more than triple the level reported both in the previous month and in the same month a year ago.
Not only is the slowdown still coming, but a "hard landing" cannot yet be ruled out. The so-called "three bears" are lurking over this apparent goldilocks economy, warns Piper Sandler's chief global economist, Nancy Lazar. They are: the Fed's tightening, the massive jump in interest rates, and the bank lending pullback post-SVB's collapse.
Sure enough, corporate revenues have already been flatlining, and falling in "real" (ex-inflation) terms. "Top-line growth is all in prices, not units, and that helps explain why employment is deteriorating," she wrote last week. Companies like Campbell Soup, Smucker, and even Dollar General highlight that problem, she notes.
"These stocks now realize these price LEVELS aren't sustainable," Lazar wrote. "We expect deflation in many of these sectors next year," even though that's never happened before in many consumer staples industries. "When egregious price [hikes] destroy demand, unit sales fall, and take pricing power with them," she warned.
And ultimately, that will become a bigger drag on employment. In fact, the current "lag" we are experiencing right now between Fed hikes and a declining labor market is pretty normal by historical standards, which have taken anywhere from 12 to 36 months.
In other words, we are only just entering the point at which we'll know how the economy will fully react to all the Fed hikes, bank turmoil, and interest rate changes of the past nearly eighteen months. For us to avoid a harder landing, the labor market will have to stabilize in this goldilocks zone of adding between 100,000 and 200,000 jobs per month, without the unemployment rate moving higher.
That's not impossible, but it's very rare to pull off, especially when the Fed's senior loan officer survey and similar "long" leading indicators remain firmly in bearish territory. The one way it might be possible, and the biggest risk to Lazar's recession call, is all of the fiscal stimulus that continues to be pumped into the economy.
Perhaps Goldman's Jan Hatzius--who has been proven correct in his bullishness this year--is right, and the job market will also continue to be much more resilient than expected. In addition, he thinks the drags from Fed policy will vanish entirely "by early 2024," which is much sooner than Lazar and others believe. Perhaps, but history suggests caution--more than celebration--should still be the order of the day.
See you at 1 p.m!
Kelly
