False alarm.

Last week’s big news starts and ends in Washington, with House Speaker Kevin McCarthy helping to prevent a government shutdown over the weekend. 

A shutdown – if it had developed into a full-blown crisis – might have set the economy decisively on a path to recession by sapping consumer and business confidence, while sending markets reeling. But here’s the thing: The run-up to shutdown didn’t correspond to big equity market declines, nor did last weekend’s favorable resolution lead to any noticeable relief rally (as I write this on Monday morning, equity markets are mixed to lower despite the weekend resolution.)

Perhaps consumers didn’t have enough mental bandwidth to focus on it. In the words of University of Michigan’s Joanne Hsu, Director of the university’s famously impactful consumer sentiment project: “Consumers have reserved judgement” about whether the potential shutdown would change the direction of the economy in a meaningful way.¹

In some ways, this isn’t surprising. What’s more, unlike the events from earlier this year, this episode was not about a potential default by the U.S. Treasury, something that is arguably much more damaging to both the economy as well as the U.S.’ standing in the fellowship of nations.

But the market’s lack of reaction to the government shutdown is by itself interesting for what it says about what matters to investors: Persistent fears that the U.S. economy is lurching its way toward recession. By way of example, that same UoM consumer survey mentioned above may have suggested that consumers were still in wait-and-see mode, but a parallel (and equally well-respected) consumer survey by the Conference Board² wasn’t so ambivalent: The “future expectations” component of that index ratcheted back below the level that signifies recession, owing to the rising cost of living, higher gas prices and rising interest rates. A potential government shutdown received a passing mention in the comments section, but the fact that the gap between those who view their family’s current financial situation as “good” and those who describe it as “bad” has almost completely evaporated this month probably had more to do with the overall weakening of confidence. And it was probably also no coincidence that higher income consumers, those earning $50,000 or more, drove the decline: Those consumers are likely most in tune with weakening stock markets.  

Housing, too, continued to weigh on peoples’ minds. It should come as no surprise that home prices remained resilient^3,4 (there’s simply not enough available inventory to expect otherwise), nor should it have come as a shock that housing transaction volumes remained depressed.⁵ (We have high and rising mortgage rates to thank for that.) But as we’ve argued here before, the housing sector often plays first-in/first-out when the economy suffers a slowdown engineered by rising rates. The fact that it’s still not on its way “out” of its funk suggests there may still be more economic softness to come.

It's worth pointing out that not all indicators are pointing down. On Friday, the Bureau of Economic Analysis released its income and outlays report for August.⁶ The most important line item in that report – so-called PCE inflation – was notably tame, something that should be reassuring to those worried about a pending resurgence in inflation. Moreover, incomes continued to rise at a moderate pace while spending was essentially flat. Again, those are reassuring signs that the Fed’s medicine of higher rates is having the desired effect.

But it also failed to generate much in the way of tangible reaction by equity markets. So what should have been marginally good news about inflation, spending and incomes became secondary to recessionary fears, higher rates on mortgage- and consumer-related debt (and, more recently, rising oil and gasoline prices.) These things, together with persistent labor tensions epitomized by the still-deepening row between the UAW and Detroit, seem likely to remain in the driver’s seat for now.

What to watch this week  

Economic events, September 25–29

Monday: ISM/PMI manufacturing 

Tuesday: JOLTS job openings 

Wednesday: ADP payrolls, ISM/PMI services, EIA petroleum inventories 

Thursday: Challenger job cuts, weekly jobless claims  

Friday: Employment situation/payrolls report

Is it payrolls week already? It seems like we just had our monthly installment of job-market data, but OK, here we go. The fun starts, as it always does, with Tuesday’s job openings and labor turnover survey (JOLTS). The centerpiece of the JOLTS release is the number of unfilled job openings across the U.S. economy, which has become one of the most important labor-related indicators of this cycle because it has been so stubbornly elevated. Part of that likely has to do with the concept of “panic hiring” (that is, companies continuing to hire even as new business deteriorates for fear of being unable to hire if and when business picks up again). Lately you’re starting to see skeptics question the accuracy of the data itself. Regardless, JOLTS has been softening for a few months running as the economy digests the Fed’s aggressive rate-increasing campaign. In an ideal world, the figure would reach back below its longer-term trend of around 5.2 million as evidence that the economy is normalizing, but given that last month’s reading was still nearly 9M, there is plenty of room to go before anyone could realistically describe the current job market situation as “normal.”  

Next up for the jobs market will be Wednesday’s payroll estimate from payroll processor ADP, together with ADP’s always informative “pay insights” release. The latter of these is perhaps the more interesting of the two given it isn’t labor market strength per se that’s the problem for an economy battling inflation; it’s the extent to which that translates inflationary to wage pressure that matters. ADP’s data has been showing a moderation of those figures, too, and it’s crucial for that trend to continue if the “soft landing” crowd hopes to remain credible. Ditto for Thursday’s layoffs report from outplacement service provider Challenger, Grey and Christmas. Those data have been moving cautiously higher, another sign that the labor market is normalizing. Like ADP’s wage data, it’s important for that trend to continue as labor market tightness continues to unwind in orderly fashion.

To be sure, that’s the real trick here: for the labor market to normalize without a big shock to the downside, or an inflationary burst to the upside. Friday’s non-farm payrolls report (aka “employment situation summary”) will give perhaps the most comprehensive look given that it includes the number of jobs created last month, the overall rate of unemployment, hourly earnings, labor force participation rates and all sorts of other good stuff. I’ll say it again: It’s crucial for the labor market to continue its benign decline if the current economic narrative is to survive intact.  

It's worth mentioning that it could become even more difficult for the labor market to thread that needle in the months ahead. It’s too early for this week’s data to include any significant impact from the UAW’s strike against Detroit’s unionized automakers, but next month’s data may tell a different story. As a reminder, striking workers are generally not included in official unemployment data like the weekly jobless surveys, but those put out of work by ancillary plant closures, slowdowns at suppliers or other knock-on effects almost certainly will be. For that reason, watching future editions of this week’s labor market data – not to mention the weekly unemployment claims data we get every Thursday – will become central to understanding what impact a prolonged strike might have.

Finally, it’s probably not too early to start thinking about third quarter earnings season. We’re still a few weeks away from the bulk of big, headline-grabbing releases, but the ability of companies to weather the higher rate environment and slowing consumer activity will be on full display as companies begin to report results in the next few weeks. For now, we’ll have to infer what those trends might be from the odd, off-cycle reporters that trickle in during the meantime (like Costco, whose report last week contained hints of consumer stress that suggested even gigantic warehouse retailers who cater to value-oriented, middle-class consumers aren’t immune to building worries about the durability of consumer spending).

Earnings reports like Costco’s, together with the above-mentioned labor market data, is where the market’s focus will probably be trained most intensely as we move forward into the fourth quarter of 2023.  

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[1] http://www.sca.isr.umich.edu/ 

[2] https://www.conference-board.org/topics/consumer-confidence 

[3] https://www.fhfa.gov/AboutUs/Reports/ReportDocuments/FHFA-HPI-Monthly_09262023.pdf 

[4] S&P CoreLogic, Bloomberg 

[5] https://www.nar.realtor/research-and-statistics/housing-statistics/pending-home-sales 

[6] https://www.bea.gov/sites/default/files/2023-09/pi0823.pdf