If inflation is not keeping consumers away from buying, where are we on the recession?

Outlook: Data today includes initial jobless claims, the Philadelphia Fed, and existing home sales. The Philly Fed is important in the context of the Empire State coming in so bad. The Bloomberg survey has -5 after -12.3 last time.

As noted above, we have severe divergence in interpretation of the Fed minutes, although as more time passes, the dovish side is losing steam and more statements favor the hawkish/resolute. It’s true the Fed wants to see what is developing in the economy, but that doesn’t necessarily mean a crack in the resolution to deal with inflation first and worry about the consequences later.

This seesawing has been going on for some time now and while the stock market is willing to buy the dovish story and seems to be buying it again this morning–or saying it can live with the strongest of hikes--the bond gang is less impressed. In FX, we had intraday volatility as traders changed their minds every couple of hours, and sometimes by so much as to signal a technical reversal, only to reverse back again, as we saw in the dollar/yen yesterday. We can’t remember the last time this happened.

Commentary today pretends analysts saw the hawkish side of the Fed minutes from the get-go, but that’s simply not true. There was plenty of doubt and real price action before the hawkish side won. Maybe this doesn’t matter much in the longer run, but it can signal that every time we get new data pointing to falling inflation and/or rising recession, we have to go through this whipsaw again.

If inflation is not keeping consumers away from buying, where are we on the recession? The Atlanta Fed GDPNow model ticked down to 1.6% for Q3 from 1.8% the day before, based on retail sales and the nowcast of real personal consumption expenditures growth down to 2.4% from 2.7%. Still not a recession. We get another update next Wednesday. Some analysts say 1.6% is not much of a cushion and Q3 can end up negative for the third quarter in a row, led by housing and durables. We say scare-mongering like this is not called for.

Off on the side but starting to become central is the global drought. It’s starting to affect economies. We have the mighty Colorado River down so far that Lake Mead is delivering dozens of dead bodies from what used to be the depths. California managed to weasel the same amount of water for homes and farms out of the multi-state water-sharing agreement, but that might not last and the country could lose a big chunk of its fresh food. The California drought is now over 20 years old.

Norway stopped exporting power from hydro dams, now down 50 feet. As noted before, traffic in barges on the Rhine and ships going through the Panama Cancel is slowing to a crawl, and in China, the Sichuan heatwave is causing rolling blackouts and rationing. “Water levels on parts of the Yangtze River, China’s largest waterway and home to its top hydro power station, dropped to the lowest on record for this time of year.” A few days ago, Bloomberg reported the heatwave is “curbing hydropower generation in a growing threat to electricity supply and economic growth in one of China’s most-populous provinces. Some factories in the manufacturing hub in southwestern China are curbing production, and the extreme weather may also cut supplies of materials like polysilicon and lithium that are vital to the energy transition.”

Two things: we may find that inflation is not the true economic problem–it’s overpopulation and climate change. Second, places, where weather/climate are not so dire, can become beneficiaries. You can bet that when Apple decided to move some production to Viet Nam, it looked at the weather map.

The combination of on-going “high-frequency” data like housing and regional Fed surveys, plus the widespread weather/climate problems, probably means inflation is going to be worse than we thought and the recession will be global and more severe. If the dollar keeps its safe-haven crown, we should see it recover into year-end. We will revise the charts and signals tomorrow and that’s what we expect to see.

But alas, climate change denial is widespread and markets are more accustomed to the near-term stuff and not the Big Picture. The recession has already started in Europe because of Russian oil and gas, can gather wind in China, and start spreading into vulnerable economies (like emerging markets). The US will not be immune but has greater self-sufficiency in just about every category, including food and energy. Predicting crises is all but impossible because they get triggered by the darnedest things from left field, but we see a crisis forming here that no central bank can tackle.

Tidbit: Bloomberg reports Goldman cut its growth forecast for China from 3.3% to 3.0%, citing weak July data and recent electricity shortages. But maybe the bigger story is that China is booking over 2,000 Covid cases for the 4th day, also from Bloomberg yesterday. Then we got a story on the zero Covid policy from the Petersen institute, which goes by the charming abbreviation PIIE.

The article is unsparing–"Beijing's clumsily executed zero-COVID policies have already taken a heavy toll on Chinese growth prospects. With a new lockdown in a resort city and no exit strategy in place, a policy reversal is unlikely and the economic paralysis appears set to continue. “ The first consequence is a “deepening sense of uncertainty” that clouds the outlook. The second is the effect of lockdowns on jobs, with acute unemployment. “Internationally, zero-COVID is making China more isolated and less competitive and may accelerate China's decoupling from the rest of the world. China needs an exit strategy if it wants to avoid indefinite isolation and paralysis.”

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