Previous Research A Red Warning in the Midst of Market Euphoria
The increase in unemployment is often considered a crucial factor in declaring a recession. Despite reaching a decade-high Fed rate in the current economic cycle, employment numbers have remained robust. This has led the Fed, economists & some macro-research firms to suggest a soft landing scenario, as inflation has already eased, job markets have remained strong, and there hasn’t been a contraction in economic activity.
However, it’s important to recognize that the impact of Federal Reserve rate hikes is typically delayed. In previous cycles, the lag has often exceeded 18 months. One way to observe this lag is by plotting the year-over-year percentage change in total US employees (Nonfarm) against the inverted Fed Funds rate. This graphical representation helps identify the delay. If historical patterns hold true, we can anticipate a noticeable increase in unemployment by the beginning of October this year.
The data available in October will play a decisive role in settling the debate between a soft landing and a hard landing for the US economy. At Airtham, we have consistently maintained our projection of a hard landing by the end of this year.
Can US Skip the Recession?
The most recent labor market data paints a concerning picture of overall weakness. Typically, the effects of changes in interest rates take some time to ripple through the economy. Historically, this lag has been around 18 months. Interestingly, this pattern held true as, precisely 18 months after the initial rate hike in March 2022, we are now witnessing the visible impact this month. The Federal Reserve consistently raised rates throughout 2022, suggesting that the consequences of these consecutive hikes will continue to materialize as the year unfolds.
SP500 & Inflation Update: Aug 2023
Airtham Macro Research: The July headline CPI release followed predictions of a slight increase, yet the actual magnitude was less significant than anticipated. This outcome sparked optimism within the market, leading to a surge in activity and speculation of a potential pause in rate hikes. However, this optimistic rally was short-lived as market participants quickly adjusted their expectations. The weaker-than-expected inflation reading meant a potential decline in economic demand. This perspective gains support from jobless claims data released a few days back, that showed claims rising to a 1.5-year high. Consequently, there's now a debate over whether further inflation reduction is beneficial or detrimental to the markets.
What’s Happening to US Tax Receipts?
One of the most crucial indicators for gauging the health of a country lies in its government tax receipts. When tax receipts rise in tandem with economic growth, it signals a thriving nation. Conversely, economic downturns often witness an accompanying decline in tax receipts. However, what's truly concerning is when tax receipts decline despite a healthy and expanding economy.