Labour markets point to recession

 On Friday, the US labour market statistics for August were released.   The data confirm my bearish view of US economic growth.

The chart below shows the change in non-agricultural payrolls over 3 months, per month.  Growth in employment fell steadily until mid-2024 (a lagged response to the rise in the Fed Funds rates in 2023), then began to rise.  A renewed (global) recovery had begun.  Then Trump's tariffs stopped this recovery in its tracks.   Employment is barely growing now, and will prolly go negative in the next couple of months.

 

A similar story is revealed by the unemployment rate.   Observe how the unemployment rate rose steadily, but stopped rising in mid-24, as the economy re-accelerated, and then started to fall, reaching a low point in January 2025.  Since then, it's been rising.

And this chart shows the dilemma the Fed faces.  The data come from the ISM (Institute of Supply Management) surveys.   They show the average for manufacturing and services indices for prices paid, and employment.  Notice how the average employment index, like the payrolls data, started to rise in mid-24, peaked in January 2025, and has been falling since.  It's now below the 50% level, which means that the majority of respondents are cutting employment.

The other line on the chart is the "prices paid" index, again, an average of the manufacturing and services ISM indices.  See how it's jumped since January 2025?   The "prices paid" data tend to lead consumer price inflation, so the rise in CPI inflation that will prolly result from the jump in prices manufacturing and services industries are paying will only start showing up in consumer prices from now on.

Rising inflation will lead to falling real incomes, which, combined with increasing uncertainty, will mean that consumer spending (~70% of GDP) will falter.   Consumers already judge that jobs are "harder to find" (from the Conference Board survey; see below), and they're right.  But combine a faltering labour market with falling real incomes, and it's hard to see how this gathering storm will be stopped without the Fed cutting the Fed funds rate.

Will the Fed "look through" the jump in inflation, arguing that it's transitory?  To me, it's not clear that the inflation increase will be short-lived.  Companies will take advantage of the huge tariff increases to up their own prices, even as the prices they pay will also soar.   Plus we're seeing plenty of anecdotal evidence that food prices are jumping, because they are picked and packed by immigrant labour.  There is no sign that Trump or his lackeys will reverse policy.  

But then I'm not in any way linked to the Fed.  I will say that the senior Fed economists and analysts I have met over the years have been formidably intelligent and well-educated.  (Though how much longer that will last is unclear).   The costs of a mistaken forecast will be significant.   If inflation is transitory, cutting the Fed funds rate will be the right policy.  If not, the Fed risks higher inflation becoming embedded in the economy.

The markets are convinced the Fed will cut rates later this month.  Bond yields have fallen, and the dollar is taking a hammering.   But equities have been more cautious.  Shares are substantially overvalued, and the rise in share markets has been primarily driven by AI/tech companies.   I deeply mistrust the AI bubble.  It reminds me of the dot com bubble, and when that burst, there followed a 50% decline in the S&P 500 over the next 2 years.  The combination of stagflation and overvaluation could be lethal for shares.

Once again, a recovery from mid-2024 is derailed by Trump's tariffs in 2025