Transcription
Well, it certainly is an encouraging sign, and the consensus was .3 on both the headline and the core. And we got a pair of 2s. And I was actually a little concerned that the number could be at least in line with consensus, if not higher, just based on the tone of the Beige Book that came out several weeks ago, taking note that a growing list of companies were starting to raise their prices in light of the early stages of this trade war. But as you said, plus 2 below consensus, I don't know if the number really matters, to tell you the truth. And you see that in the bond market, which has basically ignored it.
I do think that if it wasn't for this Trump tariff war, the Fed would probably be cutting rates right now, and you would have had at least a more constructive response by the Treasury market to today's data. But right now, the markets are being dominated by tape bombs and headlines, innuendos about any possible trade deal, agreement, framework, memorandum, and nobody really knows how these numbers, whether it's on the macro side or the inflation side, are going to play out in the next couple of months. So, what was most interesting in my opinion was the really non-reaction, in fact, slight selloff in the Treasury market to the data today, because you would have thought we would have rallied quite a bit. So, the bond market itself is telling you that it's looking through the data right now. It's just basically all about headline news and nothing more than that.
Well, I think the labor market is beginning to crack. It's not collapsing. And of course, everybody looks at the headline non-farm payroll report and the fact that the unemployment rate, which is a lagging indicator, is still rather low at 4.2%. But when you look through the surface, you could see a real change in complexion that wasn't there in the last recession scare that we had back in 2022 and 2023. And what I'm talking about really is the internals. You know, like how you would have an equity market specialist on this call and you'd say, well, you know, beneath the headline, tell me about the market internals. The job market internals are weakening across a broad front. The hiring rate has plunged. It's below where it was during COVID. Companies are hiring fewer and fewer workers. The only reason why the headline employment numbers haven't been negative is because you haven't seen a firing cycle or a layoff cycle. But the layoff cycle typically follows a rapid decline in the hiring rate. Hires go down first. The fires follow down the road. The hiring rate is way down. Job opening rate way down. That's the classic signpost of labor demand. Job posting, job opening. They've fallen dramatically over the course, not just the past 6 months, but in the past 12 months. And the one thing that you like to look at in the labor market from a behavioral standpoint is what's called the voluntary quit rate. I call it the "take this job and shove it" index. And it's the degree to which workers are hopping from one job to another. When that number is going up, workers have tremendous confidence and enthusiasm and a bullishness. They have bargaining power. We saw that dramatically back in 2021, 2022, 2023. The quit rate has gone down precipitously. So, we're starting to see a real softening beneath the veneer as it pertains to the labor market. It's been a bit of a frustrating indicator because it's been going down for quite some time. And actually, it was going down during that recession scare of 2022 and 2023. The recession. It was like waiting for uh Godot and the recession never came. But that leading indicator is still going south. It's down in the past 4 months and it never behaves quite the same, nor does it have the same leading property cycle by cycle.
I like to look at the year-over-year trend in the LEI. And remember, this is an indicator that's been around for the better part of the past six decades. It is tried, tested, and true. It's just that the lags sometimes take quite a while to percolate through to the real economy. But the year-over-year trend right now has been running negative since the summer of 2022. Right now, it's negative -3.5%. And I only posit that if we manage to escape a recession, it'll be the first time that's ever happened with the leading indicator in negative territory year-over-year as deep and as long as it has been. So, we'll see what happens in the second half of the year. What got in the way of the LEI declining, which was precipitated back in 2022, 2023 by the most acute Fed tightening cycle since the Volcker years of the early 1980s. What got in the way of the recession call were two things: the excess pandemic savings. You remember the Joe Biden $2 trillion of stimulus checks mailed out to anybody who had a pulse. And I, for one, and I think most people, never thought that all that $2 trillion, think about that number, would get spent. It was the gift that kept on giving. It was the classic Energizer Bunny. All those excess savings have been depleted. But on top of that, we also had other forms of fiscal stimulus. The Biden CHIPS Act, the Inflation Reduction Act, which was a bit of an oxymoron. All these massive subsidies, they're not around anymore. We don't have the fiscal stimulus. I read RealClearPolitics every day, and I'm telling you, people think that there's going to be this big, beautiful budget bill being passed in Congress. It's hitting a wall. There's not going to be any fiscal stimulus. And the Fed is still pinning the funds rate at 200 basis points above the rate of inflation. The real funds rate is plus 200 basis points, where it was in 1980, in 1990, in 2001, in 2008. Fed policy is very tight, and the Fed is pinning the funds rate at 4 and a quarter to 4 and a half, even as inflation is coming down. I guess the big question is, will it continue to come down? But you have a real Fed funds rate that's at the same level it was preceding each of the past six recessions. So, you know, when we talked about this Volcker-esque type of Fed tightening cycle back in 2022 and 2023, but you know, it was less tight. When I look back as a Monday morning quarterback with perfect hindsight, the reality is that even as the Fed was raising rates, inflation kept on going up. So, for most of the Fed tightening cycle in 2022 and 2023, the real funds rate was negative, and it didn't climb out of negative territory until April 2023, when the tightening cycle was almost over. So, that was the other, call it, misnomer about the Fed tightening cycle. It probably wasn't tight enough when you look at the funds rate in real terms. But now it's just as tight as it was preceding the last six recessions. And there's no fiscal stimulus this time getting in the way. So, with or without the trade war, just the fact that the Fed is actually backdoor tightening by keeping the funds rate stable as inflation goes down, that's monetary tightening at a time of no fiscal stimulus, and you have a run rate on real GDP now, it's not 3 or 4% anymore, it's 2%. And then we can layer on all the trade and tariff uncertainty, which you could argue has dissipated over the weekend, but has not gone away. We have a very challenging economic backdrop ahead of us this year and into 2026.
Well, except for the fact that the unemployment rate is now at 4.2, not 4.4. But again, I like to go back into the history books, cuz I don't believe in the refrain that it's different this time. I try to find true, tried, tested indicators that have never gotten the cycle wrong. And it's not the level of the unemployment rate that matters, because I get that all the time. Well, look, it's only a 4.2% unemployment rate. Look, I can show you lots of recessions back to 1948 where the unemployment rate was 4.2%, 2% at the start of the recession. It's not the level, it's the change that matters. It's the change off the cycle. So really, when I'm taking a look at the fact that we've gone from 3.4 to 4.2, and I think it's going to be going higher in the next several months because it tracks the hiring rate so closely, that yeah, I think that that is a very important barometer, not the level of the unemployment rate, the year-over-year change. Ignore that at your peril. So, basically, that still stands, that still holds today, 100%. I really don't know how you could draw a conclusion that this is going to lead to a rebound in economic growth because a 125% tariff that China had on, and the 145% that the US had on, was basically like a month. If you're going to tell me that for the past 10 years we went from a 145% tariff rate to 30%, I'd say, well, hallelujah, cuz we probably will go from zero trade to massive trade. I don't know how anybody could say that the economy is going to be doing better. Let's say the 145% tariff rate that the US had on China, that's gone to 30%. How has that improved the economic outlook? It wasn't imposed that for that long. I think that we avoided potential Armageddon because it's a de facto embargo, and you would have had a $600 billion trade relationship go to zero, but it was there for a month. So, how do you say that, well, boy, all of a sudden there's no recession? Besides the fact that when you're taking a look at the fact that the US still has at least 10% baseline tariffs with everybody else in the world, and when you're taking a look at the de facto net effective tariff rate, the United States against the rest of the world, where is it right now after what happened on the weekend with China? Where is it? It's over 13%. So, you say, "Oh, it's not a 24% anymore." No, it's not. It's a 13. But where was it for years and years before the Trump tariff war? It was 2.5%. That's what the baseline de facto tariff rate was that everybody was operating under in this global trading relationship. So, we've gone from 2.5% and as things stand right now, and look, we have no idea with this mercurial president that can change his mind at a whim, which he does quite often. Right now, the only thing we know for certain is that the net effect of tariff rate is over 13%. And that before all this started, it was 2.5%. So, the way I see it, the effective tariff rate, the levy on global trade, has gone up 10 percentage points. It's gone up fivefold from where the long-term level was. That's a huge shock. Now, it's not as big a shock as it was, but we're comparing walking the plank to just going back to the ship in pretty stormy waters. So, no, I don't buy into that view that there's no recession coming out of this. This is a 10 percentage point shock on a $30 trillion beast called global trade. And people are going to tell me, "Oh, there's going to be no impact from that." The only impact would be if it stayed at 24%. No, this is actually still a very sizable negative shock. And when it plays through more forcefully in, as you mentioned, the hard economic data, the second half of the year, it is going to hit hard. If you're going to tell me, well, Donald Trump is going to do a complete reversal of everything, well, then we can talk turkey. But I don't see him doing that. He's on a partial walk back. It still represents us with significant shock. It has not worked its way through the economy. We have to keep in mind something else about this illusion of growth we've been seeing because everybody knowing that or thinking that tariffs were coming, and not just with China, but globally, what were Americans doing the past several months? Pre-ordering, inventory buildup, and a lot of precautionary buying ahead of the tariffs, which gave this illusion of growth that is going to create a huge vacuum in the economic data in the back half of the year. So, I think that people involved in this risk-on trade, and as you mentioned, that people thinking, oh, we dodged a bullet, we didn't dodge a bullet, we dodged a cannonball. The bullet is still there. And when the bullet comes in the second half of the year, nothing is priced for a bullet right now. People are going to be in for a very big surprise. Surprise looks like an outright recession. The recession that didn't come in 2022, 2023. The recession which is about the boy who cried wolf, although the wolf shows up at the end of that story. The recession that nobody wants to call because once burnt, twice shy. We got it wrong in 2022, 2023. We don't want to make that mistake again. So, everybody is just, you know, playing the cards close to their vest. I mean, here you have, I mean, come on. Goldman Sachs comes out and says that their recession odds have gone from 45% to 35%. How anybody comes up with those numbers, I think that's just basically a game of pin the tail on the donkey. 35% recession odds. Okay, whatever that means. But here's what it means. People say, "Well, it's not 100. It's not 90." 35% is actually pretty high. And there's nothing, well, there's no asset class priced for it. Credit spreads aren't priced for it. The stock market certainly isn't priced for it. I'm not going to sit here and give you odds. I guess I like to say everything's a shade of gray. Nothing is black or white. Nothing is zero or 100. So, I guess I'll take it back. But I still don't know what 35% means. Do people feel good about 35%? I feel better if it's 10%.