{"id":44986,"date":"2023-08-05T22:42:17","date_gmt":"2023-08-06T02:42:17","guid":{"rendered":"https:\/\/ifintechworld.com\/markets\/no-soft-landing-the-data-says-so\/"},"modified":"2023-08-05T22:42:19","modified_gmt":"2023-08-06T02:42:19","slug":"no-soft-landing-the-data-says-so","status":"publish","type":"post","link":"https:\/\/ifintechworld.com\/?p=44986","title":{"rendered":"No Soft-Landing \u2013 The Data Says So!"},"content":{"rendered":"
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The major financial market mover this week was always going to be the employment report. Markets sloughed off the Fitch downgrade of U.S Treasuries to AA+ because the rating is based on long-term issues (like the size of budget deficits), while the markets are mostly about tomorrow or next week with some lip service to next quarter. (More on this topic below.)<\/p>\n

The +187k Non-Farm Payroll report slightly disappointed a market looking for +200k. So, Friday (August 4) produced a one-half percentage point drop in the popular equity indexes, and, concurrently, more significant downward moves in Treasury yields. The yield fall occurred despite the U3 Unemployment Rate falling to 3.5% from 3.6% (from a lack of growth in the labor force). This is likely to weigh on the Fed\u2019s September decision process regarding rates as the Fed secretly wants to see a U3 of 4.5%, but politically they can\u2019t say so!<\/p>\n

Because Q2\u2019s GDP growth was on the high side of sentiment (+2.4%), and Payrolls are still moderately positive, many Wall Street economists have thrown in the towel on their Recession call and have adopted the \u201csoft-landing\u201d mantra (i.e., slowing economic activity, enough to conquer inflation, but no economic contraction). Such an accomplishment is quite rare in Fed economic history. Our views haven\u2019t changed. We see an unfolding Recession.<\/p>\n

Payroll Detail<\/h2>\n

When one takes a closer look at the detail of the employment numbers, the picture is not so rosy. Prior to the employment release, markets were worried about an overly strong report (which would push the Fed to raise rates further) because, on Wednesday, ADP reported significant strength in their employment survey (+324k). Turns out that those numbers were driven by the Leisure\/Hospitality sector, which showed up as +201k. In Friday\u2019s Non-Farm Payroll report, this sector showed up as +17k, and in the April-July period, ADP\u2019s count in this sector is a massive +783k, while the Non-Farm Payroll number was a more sensible +75k. BLS doesn\u2019t survey small businesses like ADP does, but the 708k difference does appear to be quite out of line with reality. Some have speculated that the ADP seasonal adjustment process is flawed. We observe that the ADP report has been out of whack with Non-Farm Payrolls ever since they retooled their survey last spring.<\/p>\n

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So, was this a strong or weak employment report? Looks solid at first glance, but not so when parsed. 1) The workweek fell -0.3% from June (-0.1 hours\/week). 2) BLS revised May and June lower by -49k. 3) The Birth\/Death model automatic add-on (not counted) was +102k (which comes from a trend-line growth over a long-period of time and is not sensitive to the current economic backdrop). Here is what Economist David Rosenberg had to say:<\/p>\n

\u201c\u2026when you adjust for the decline in the workweek, payrolls actually slid -125k on an equivalent \u2018worker hour\u2019 basis. Then count in the two-month revision of -49k [to May and June Payrolls]\u2026 tack on the Birth-Death distortion \u2026 [and] account for the surge in multiple job holders, and the \u2018real\u2019 number was -394k.\u201d<\/em><\/p>\n

Quite a difference from the +187k starting point. The chart at the top of this blog shows total payrolls (blue), the private sector (ex-government), and the private sector less the health-care sector. Note the steep downtrend since October 2021.<\/p>\n

After parsing the Payroll data, both the equity and fixed-income markets decided that the numbers were actually weak. So, equity prices continued their week-long downdraft while bond yields fell (prices rose) as markets concluded that the Payroll Report, alone, would not push the Fed to raise rates in September.<\/p>\n

The raw (Not Seasonally Adjusted) data for July actually show that Non-Farm Payrolls contracted by -819k (that\u2019s not a typo). Thus, it is hard to imagine anyone calling the jobs report \u201cstrong\u201d (but the media did!). Regarding this number, Rosenberg observed that the July 2019 Not Seasonally Adjusted number was similar, but that resulted in a Seasonally Adjusted number of only +82k. Contrast that to the +187k that is BLS\u2019s latest Seasonally Adjusted number. While seasonal factors can change, we have a hard time believing that they can change that rapidly. And, as observed by Rosenberg, the fact that the Payroll data has had negative revisions for seven months in a row makes us wary of the quality of the original data.<\/p>\n

Inflation News<\/h2>\n

In past blogs, we have cautioned readers about the \u201cbase effect\u201d issue that is likely to disappoint markets (and the Fed) when July CPI is released. In addition, the year-over-year rise in average hourly earnings (+4.4%; +0.4% in July) is still too hot for this Fed. Nevertheless, we see a continuing disinflationary environment going forward.<\/p>\n

Housing costs make up a significant portion of the CPI (30%+). Note on the chart the Apartment List National Rent Index (purple line) vs. the CPI rental component (blue line). The CPI rental component has a very long lag. It just turned down in June while the Apartment List Index has been declining for quite some time. Thus, the path forward for the CPI rent component is down, and down significantly, for the next few quarters.<\/p>\n

The Rating Downgrade<\/h2>\n

As noted at the top of this blog, the Fitch rating downgrade to AA+ from AAA for U.S. Treasury securities didn\u2019t cause much of a stir in the financial marketplace. But it should be taken quite seriously. S&P downgraded U.S. debt to AA+ back in 2011, and Moody\u2019s has had Treasuries on negative watch for more than a decade.<\/p>\n

While the markets have all but ignored this (and we note some critics calling the rating \u201cridiculous\u201d), the public should take the downgrade seriously (but it won\u2019t). Here\u2019s why:<\/p>\n