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While many leading indicators have been suggesting elevated recession risk for several months, coincident data remains reasonably strong. If inflation continues to decelerate, a soft landing is plausible (albeit still not a base-case scenario in my view).

After a bumpy start, China’s economy is likely to reaccelerate with their Covid reopening and stimulus measures, which could help the Eurozone and global economy achieve at least a “softish” landing.

Last week’s jobs report was mixed but on balance fairly good. Notably, wage inflation (which the Fed is hyper-focused on) declined even with solid job gains—raising the prospect of inflation cooling without the need for a Fed-induced recession. The CPI report later this week and the Employment Cost Index (ECI) at the end of the month will provide further relevant data.

The non-farm payrolls gain from the establishment survey was confirmed by a positive number in the household survey. And the unemployment rate fell along with an increase in the labor force participation rate. Also, cyclical job categories (e.g., manufacturing, construction, and mining) continue to show steady gains.

However, the total number of temporary jobs, a long leading indicator, looks like it peaked in July and has declined sharply since. Also, part-time employment for economic reasons, another leading indicator, appears to be on the rise. Additionally, average weekly hours and overtime hours continue to decline.

Notably, US Services PMI fell below 50 last week (the dividing line between expansion and contraction) for the first time since April 2020. That’s following a decline through 50 for the Manufacturing PMI last month. Services PMI fell from 56.5 to 49.6, versus the 55.0 expected. So, trending down, worse than expected, and below 50.

Built-up household excess savings might be one reason to think the economy can muddle through. But the savings rate has fallen dramatically, and excess savings are declining (in the context of smaller government budget deficits and a higher trade deficit). Furthermore, inflation is reducing the real purchasing power of those savings, and with weak consumer sentiment, the precautionary motive to hold cash balances has likely increased.

In summary, the weight of the evidence suggests that recession risk remains high, but there is still a chance of a muddle-through/soft-landing. As always, the outlook remains data-dependent and requires constant reassessment.

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