Data over the past month was mixed but on balance increasingly suggests recession risk over the coming year. The Conference Board’s Leading Economic Indicators (LEI) Index is down six months in a row and negative on a year-over-year rate of change basis. That’s historically consistent with a coming recession. Also, the global manufacturing PMI reading has now fallen below 50 (the dividing line for expansion and contraction) for the first time since February 2020.

Interestingly, the 10y3m yield curve still has not inverted and has even steepened over the past month. 10y3m inversion has occurred prior to every recession since the 1960s (as far as the data goes back) and initial inversion historically leads to recessions by several months. Also, data from the labor market (e.g., the number of temporary jobs) suggests continued expansion for now. A US recession might not start until the second half of next year.

The Fed’s framework implies that they will end up overtightening (if they haven’t already). Last month’s CPI report was a setback. Powell’s comments on “clear and convincing evidence” suggest he’s looking for three consecutive months of improvement. July’s data provided 1 out of 3, but the August report set things back to 0 out of 3. The September data comes out later this week.

The jobs report showed a decline in the unemployment rate on the back of a decline in the labor force participation rate. That’s the opposite of what might lead to a soft landing: higher unemployment on the back of higher labor force participation with ongoing job gains (which we saw in last month’s report).

House prices fell for the first time in over a decade, which suggests that rent inflation should slow materially over the next year. 30yr mortgage rates are making new multi-year highs, above 7%, which should continue to cool home prices. Also, US building permits were sharply lower last month—typically a long leading indicator for the economy.

Internationally, there are signs of financial instability that might lead to central banks rethinking their tightening pace. Dysfunction in the UK bond market has led to intervention by the Bank of England. Generally, a gradual tightening of financial conditions is welcomed by central banks, but uncontrolled financial instability is unwelcome. Notably, stress is starting to show up in the global dollar funding market, and Fed swap line uptake is starting to increase. Further signs of global financial instability could cause the Fed and other central banks to back off, although by that point the damage would likely have been done—making a soft landing unlikely.

The outlook remains uncertain with risks to economic growth clearly skewed to the downside. As always, the data and frameworks presented inevitably don’t capture all possible risk factors in real-time and the outlook requires constant reassessment.

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