Three big events defined this week, including softer-than-expected inflation data, worse-than-expected labor market data, and further pressure on regional banks, namely PacWest Bancorp.
Starting with inflation, headline CPI cooled to 3.9% from 4.0% on a smoothed six-month annualized basis. Inflation has retreated from nearly 10% in the summer of 2022, but the pace of decline has slowed.
So the shelter component, which will mechanically decline over the next 8-12 months, is adding 200bps to the inflation rate and causing the Federal Reserve to hold policy far tighter than the underlying economy can handle.
The much-feared service sector inflation has also cooled sharply in recent months. The 3-month annualized pace of services inflation less rent has fallen to 0.8%, while the 6-month pace has dropped to 3.7%.
Inflation follows a money-price-wage spiral. The continued contractions in monetary growth have stunted the price growth of commodities, homes, and other asset prices. After the price level stops rising, and starts declining in more extreme cases, then corporate margins compress, layoffs begin, and wage pressure collapses.
Clear signs have emerged that the labor market has turned, so wage growth will follow, as it always does, in the second half of the recession.
Initial jobless claims, on a 4-week average basis, are rising at a 31% annualized pace. The average recession started with initial claims growth of 24%. Initial claims is a volatile series, so several false flags exist.
Since the late 1960s, the economy has never avoided recession while continued claims were rising at this pace.
Now some people are suggesting the base effect is skewing the growth rate.
This is exactly why we use the “basket” approach and stack these recession signals across various indicators, sourced from different agencies, reports, and methodologies.
Temporary help jobs have been a reliable leading indicator of employment and recessions. Temporary help jobs are used in various leading indicators, such as the Conference Board Employment Trends Index, which is used as a leading indicator of employment.
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