Hard Landing/Soft Landing Scoreboard
Recently economic data has taken a bit of a backseat to uncertainty around rate cuts and potential political impacts on the markets. But while those two issues are driving markets right now, whether we keep this soft landing intact or it deteriorates into a hard landing is still the most important medium- and long-term question for markets and because of that, we must continue to closely watch economic data (which we have).
Positively, there are virtually no signs in the important economic data that imply the economy is deteriorating. If anything, it’s actually the opposite as underlying economic data has improved over the past month to the point where solid data is adding to investor fears the Fed may pause rate cuts.
At this point, the data isn’t that good yet, but we have seen a solid uptick in activity over the past few months that has kept slowdown chances low. Now, to be clear, just because a hard landing hasn't happened, it doesn’t mean it won’t happen. If the Fed does pause rate cuts that means we will get higher-for-longer rates and that will weigh on economic activity. So, we must continue to pay attention to data, because if we get a growth scare with stocks at these valuations it’s a long way down to support.
For now, though, the latest update of our Hard Landing/Soft Landing Scoreboard shows all the indicators we track saw improvement over the past month (which again is a good thing).
- Of the Big Three monthly economic reports, one remains soft while the other two are showing solid activity.
- Consumer spending has seen acceleration. Consumer spending spent much of 2024 stuck in neutral, but the last few months of 2024 saw an uptick in retail sales, implying the consumer remains resilient. With consumer spending solid, a broad economic slowdown remains unlikely. What signals a hard landing? Retail sales roll over and begin to drop sharply, falling to multi-month lows within the next three months.
- Business spending may be accelerating. New orders for nondefense capital goods excluding aircraft (NDCGXA) is the best metric we have for national business spending and investment, and while it plateaued for much of 2024, we did see an acceleration in business spending and investment in November. That makes sense as election clarity will likely unlock spending and investment that was waiting until we had political clarity. What signals a hard landing? NDCGXA falling to multi-month lows in the next three months.
- Employment indicators remain broadly resilient (and have improved over the past month). Labor market data has been noisy over the past few months starting with a very soft number in August, continuing through the hurricane influenced jobs report collapse in October, followed by two strong months of large rebounds (including the December number, released earlier this month).
However, for all the noise around the monthly data, weekly jobless claims have remained very low (near 200k) while the unemployment rate has been stable just above 4.0%. Point being, there’s noise in the labor market data but nothing is signaling material deterioration. What signals a hard landing? Monthly job adds drop below 100k and/or claims above 300k.
What I am saying is there is not much to worry about going forward.
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