Powell's Soft Landing Still in Peril

Why, it seems like only yesterday that I was writing about how Powell said,

risks to achieving employment and inflation goals “continue to move into better balance”

To which I explained,

Powell essentially feels both jobs and inflation are in the sweet spot where neither one demands immediate action. He said that he believed the labor market had loosened enough that wage pressure on inflation was no longer a factor, so the Fed’s main concern with jobs was to make sure unemployment doesn’t rise more than where it is. He is happy with the present slight rise but believes the Fed is coming in for a soft landing where raising unemployment will not be necessary.

Today, however, the balance in labor reports continued to shift. In fact, it shifted enough to move markets substantially. As of this writing, the Dow is down more than 500 points and still sinking.

What sunk stocks today?

The first thing to cause the slide in stocks was data that expanded on yesterday’s poor jobs data, which had shown a decline in new jobs. Today, we see a corresponding rise in unemployment. New applications jumped upward in the way they typically due as we sweep from a lull of low unemployment into a the kind of upward swing that marks the very start of a recession.

We’ve swept past the magic number of the Sahm’s rule, which Powell was asked about and gave some lip service to yesterday as an “historic phenomenon” (or something like that); but it an historic phenomenon that has never missed its mark for the start of recession whenever it has passed this juncture.

While the broken labor metrics have fluctuated back and forth (danced around) this pivotal number a few times (because they are broken), they moved solidly in the recessionary direction today:

The stock market tumbled on Thursday as fresh data stoked fears over a possible recession reversing momentum from earlier in the week….

“The economic data keep rolling on in the direction of a downturn, if not recession, this morning,” said Chris Rupkey, chief economist at FWDBONDS. “The stock market doesn’t know whether to laugh or cry because while three Fed rate cuts may be coming this year and 10-year bond yields are falling below 4.00%, the winds of recession are coming in hard.”

“The winds of recession are coming in hard,” and today’s move in bonds confirms the concerns exhibited by stock investors:

Yields on U.S. government debt continued to sink on Thursday in a sign of the bond market’s growing nervousness about the overall strength of the economy ahead of Friday’s nonfarm payrolls report for July.

The benchmark 10-year rate BX:TMUBMUSD10Y fell below 4% on an intraday basis for the first time since Feb. 2 after Thursday’s batch of data, which included weak manufacturing-sector activity for July and weekly jobless claims that jumped to an almost one-year high. Traders were also looking ahead to Friday’s nonfarm payrolls report and the likelihood that it will show continued softness in the labor market….

Thursday’s plunge in yields is the result of “everything” going on in the economy right now, including a relatively weak manufacturing report from the Institute for Supply Management and initial jobless-benefit claims that came in higher than expected, according to Tom Graff, chief investment officer at Baltimore-based Facet….

The bond market is saying “not only is inflation coming down, which was already priced in, but that there might be some real economic weakness and that’s a change in narrative,” Graff said via phone on Thursday. “And that’s why we’re seeing rates drop in the long end….

“Labor-market data has been on the soft side for a couple of months so investors have to consider the possibility that this is the beginning of a trend,” said Graff

And here are the bad actors that beginning to show up and trigger markets that have been in denial about the storm of recession that has been building but simply isn’t seen in election-year cooked GDP: (Apparently, it is finally getting to hard to adjust away in government labor reports.)

It was a double-whammy that broke markets, the first part of which came from the labor market:

Initial jobless claims rose to 249,000 last week, higher than a Dow Jones forecast of 235,000 and the most since August 2023. The ISM manufacturing index came in at 46.8%, worse than expected and a signal of economic contraction.

The highest level of jobless claims in almost a year, as Americans filed for unemployment benefits, got some attention along with a corresponding drop in production. This is the tenth week in a row where new claims have topped 220,000, which is what has been inching continuing-unemployment up to the level that triggered the Sahm’s Rule warning, raising questions before Powell at yesterday’s post-FOMC presser.

To be clear, these are not, in themselves, alarming numbers. That is, they are not extremely high layoffs by any means, but they have tipped continuing unemployment up by more than the 0.5% rise necessary for the Sahm’s Rule to say “recession is here.” Until now, the labor moves hinted “recession is coming.”

This all fits with my longtime warning that labor statistics would be very slow in showing the actual changes in the economy—so slow that, by the time Powell can see enough warning in labor stats to start backing off on interest rates, we’ll be deep into recession—the stealth recession that has already begun. (Stealth in that it is not showing up in real GDP due to fake inflation being taken out, and not, therefore, being officially declared (though that always comes two quarters after the recession actually begins anyway).

The second hit came from manufacturing data where Powell’s 747 that he is bringing in for a soft landing hit stall speed ahead of touch-down:

"Near Stalling Of Production" - US Manufacturing Surveys Collapsed In July

… US manufacturers … new orders declined for the first time in three months, according to S&P Global….

This makes sense as we have seen 'hard' US macro data serially disappoint for three months.

Yes, while government-reported GDP soared over the last three months, actual production fell for two of those months plus the first month of the present quarter, just in.

S&P Global US Manufacturing PMI falls to 49.6 in July, dropping into contraction for the first time since Dec 2023.

That kind of decline in production as reported by actual industry is not what should be happening if real GDP growth was actually real (a strange phrase to have to use) when the Biden administration reports a 2.8% growth rate in production for roughly the same period.

But it gets worse by another measure:

ISM Manufacturing PMI plunged to 46.8 (48.8 exp) … (near post-COVID lockdown lows)

And, as for that inflation that Powell said was looking like a soft landing, I’ve been saying it is about to rise because prices on the producer side have been rising, and we saw more of that trend further up the pipeline today:

Rubbing some salt in the wounds was the fact that Prices Paid rose while New Orders tumbled and Employment puked (to the lowest since COVID lockdowns)...

Eventually, that comes down the pipe to consumers. Producers don’t keep absorbing higher prices (nor do retailers as they buy from producers) without eventually forcing those prices on to the consumer. If consumers won’t pay it, products don’t sell, and recession deepens. So, you get inflation up more or recession deeper in the hole … like this:

“Business conditions worsened in July as the first fall in new orders since April caused a near-stalling of production. Purchasing activity is falling and hiring has slowed amid concerns over weaker-than-anticipated sales."

I always try to keep you abreast of the true facts here at The Daily Doom because you certainly won’t hear the government crowing about them in a tough election year. The real bad news, however, is not in these slowly worsening recession measures but in the historically massive commercial real-estate crisis that is now on the steep part of its worsening curve, which I’ll be covering in my Deeper Dive for paying subscribers at the end of the week.

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