Sometimes You Take a Hit or Two

But you don't give up just because of that.

Retail sales would like to prove me a liar today by coming in much hotter than would align with my claim that we are already sinking in the mire of recession. The news, which sounds like it was a surprise to everyone, sent the 10YR Treasury back up to more than 3.95% midday, and sent stocks up to where the Dow cleared +550, and the Nasdaq beat +400.

Yields took a big leg up Thursday morning after retail sales jumped 1% in July, far above a forecast of 0.3% growth from economists polled by Dow Jones. That can be taken as a sign that consumer spending is too robust to justify fears of a recession, or even an economic slowdown.

OK, well, you take one or two in the face once in awhile. This is no knock-out blow for my recession claims, but it a good punch in the face. However, I’ve also learned that standing my ground on what I’ve seen coming and not letting single markers mean too much has almost always been the best play for me. Along the way, there have been things that seemed to contradict what I’ve claimed will happen; but, as I dug deeper, I found they were not what they appeared and the trends I believed would prevail did prevail.

With this one, I don’t yet know; but I’ll tag on to the next paragraph in the same article in order to block the punch.

Concerns that the economy was headed for a slowdown were stirred two weeks ago when July nonfarm payrolls came in far weaker than Wall Street had expected.

And that was really about as close as you get to a knockout punch to the other side for any hope they had of a soft landing that skirted recession. Instead, those numbers moved us up to a level of unemployment that is always associated with being in a recession. (As I’ve covered based on the most accurate timer of recessions we have—the Sahm Rule.) So the fight’s a little rough.

It is easily possible, of course, that the recession indicator that is off here is the unemployment gauge, not retail data. No metrics have been more broken, in my opinion, for the past few of years than the labor metrics that the Fed uses for guiding monetary decisions. It would hardly be the first head fake from labor as we cross a critical line into recession if the move in unemployment over the Sahm Rule’s trip wire was just another fake and unemployment went right back below the critical level in the next report.

In fact, today’s reports did show some tightening of labor back away from recession:

Meanwhile, initial jobless claims statistics also released Thursday came in lower than economists anticipated, signaling firm demand for labor.

So, that’s a one-two punch to my face. It wouldn’t be too surprising, really, if the broken labor metrics waver around a bit as we strike a change in trend. One cannot expect them to be too reliable this time, and especially in an election year since the current administration calculates them and has a strongly vested interest in NOT showing recession. That, in turn, would make the Sahm Rule less reliable as a gauge of when recession began since it relies on that data. Nevertheless, I’m holding my ground for now. It should be clear in a month which way things are moving … I think.

After a more than 3% gain this week, the S&P 500 is now roughly 2% below its record. The three major U.S. indexes are now trading above their Aug. 2 closing level, which was the session before the global stock market rout on Aug. 5 that was largely driven by investors’ concerns about an economic slowdown and an unwinding of a popular hedge fund currency trade.

“Today’s solid retail sales and claims data is a reminder that the sky is not falling on the U.S. economy,” Wolfe Research chief economist Stephanie Roth wrote on Thursday. “Yes, economic momentum has cooled, but we don’t appear to be headed for recession imminently.”

They may eat those words, or I may have to eat mine. We shall see. Years of doing this have taught me not to throw in the towel too soon, especially when it’s just one or two metrics that suddenly give me a black eye when all else was going as expected. (No straight lines.)

The CPI chokehold

Of course, CPI tried to strangle me over inflation in the headlines this week, too; but a deeper look there told otherwise. And, today, I’m no longer the only one saying the year-over-year headline number is not the one to be going by; the one to look at most is the month-on-month number when one wants to know if a trend is starting to change. (The YoY numbers tend to show better that it has changed once we get further down the road.)

So, while all the headlines I saw yesterday said that CPI was falling in perfect step with what the Fed needs to see for its first rate cut and recession-free soft landing (and was billed that way by a number of financial writers), a story that I came across today ran an opposing headline that fastened on the MoM number that I also focused on:

Consumer Prices Rise in Latest Federal Inflation Data [emphasis mine]

Consumer prices rose again last month after dipping in June, according to newly released federal inflation data.

The U.S. Bureau of Labor Statistics on Wednesday released its Consumer Price Index, a key marker of inflation, which showed that consumer prices rose 0.2% in July [MoM].

The latest CPI increase comes after a 0.1% decrease in June. BLS said that shelter cost increases accounted for 90% of the increase.

So, it was, as I’ve been saying we would see about now, shelter costs that pushed up the MoM measure of inflation. If that keeps happening, then each month of small rises will do all over again exactly what I said we’d see last summer and did. The incremental monthly rises will eventually push up the YoY numbers. And it is starting to happen right where readers here would have been expecting to see the present rise show up—sometime in reports coming out between August and September, possibly a little later than that; but most likely August-September for the start.

And if the Fed starts cutting interest rates in September as it has strongly hinted it might this time, then inflation will be rising faster still by late in the year or early next year. If that starts to happen, let’s hope the Fed doesn’t say, “It’s transitory.” We know where that goes.

I’ll dig deeper into those inflation numbers, as promised, in tomorrow’s article for paying subscribers, going over the other strong forces that are putting upward pressure on inflation in lieu of posting headlines unless something bigger breaks.

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