The “hard landing vs. soft landing” question remains the most important one for markets over the medium- and longer-term for this simple reason:
If there’s a soft landing, then the S&P 500 is moving towards the old highs above 4,800, which isn’t out of the question. Conversely, if there’s a hard landing, it doesn’t matter what the Fed does because rate cuts will be too late, and a 10%- 20% (or more) decline is likely.
Given these high stakes and the lack of a comprehensive way to monitor whether the data is pointing to a hard or soft landing, in April, our research team created the Hard Landing vs. Soft Landing Scoreboard so that we can all “follow along” until data definitively points to a winner.
Considering the updated data through today, the conclusion of the Scoreboard hasn’t changed: A soft landing is currently more likely than a hard landing. However, over the past month, we have seen some slowing of activity across the economy. While that’s not enough to increase hard-landing worries, I want to point out that some growth metrics are losing momentum. As such, we need to continue closely monitoring economic data because if there is a “growth scare” in the coming months, that will be a negative for stocks.
- Only one of the “Big Three” monthly economic reports is flashing hard landing. It’s not strange for the ISM Manufacturing PMI to drop below 50 and signal contraction when interest rates rise sharply, and even when that happens, it doesn’t mean a broad economic slowdown is imminent because manufacturing is a minor part of the economy. However, it is not normal for the ISM Services PMI to drop below 50 (just once since the depths of the pandemic). The ISM Services PMI dipped in October and is now at its lowest since March. If that PMI drops below 50 for a few months, it’ll be a clear negative economic signal. What signals a hard landing in the future? ISM Manufacturing PMI declining further, ISM Services PMI dropping below 50 in the next month or two.
- There are no real signs that U.S. consumer spending is materially slowing. Retail sales, which is the most comprehensive measure of consumer spending each month, eased this month but remains generally elevated, and it’s not at a level that would increase expectations for a hard landing. Corporate commentary on consumer spending over the Q3 earnings season was more cautious than earlier in the year, so between the two metrics, there is proof that the pace of consumer spending is slightly slowing. But again, it’s not at a level that implies a hard landing. Looking forward, there remain risks to consumer spending, including the resumption of student loan payments and the potential exhaustion of excess pandemic savings. For now, consumer spending remains resilient and is not indicative of an economy that’s about to slow meaningfully. What signals a hard landing? Retail sales roll over and drop sharply, falling to multimonth lows within the next three months.
- Business spending remains robust. New orders for non-defense capital goods, excluding aircraft (NDCGXA), are the best metric for national business spending and investment, and they remain near recent highs. So, while there’s a lot of general angst about future economic growth, it’s not impacting business spending or investment. What signals a hard landing? NDCGXA falling to multimonth lows in the next three months.
- Employment indicators are not softening, and overall the job market remains both strong and tight. Employment is a lagging economic indicator, which means it only deteriorates after the economy has slowed materially. There is little evidence that’s occurring right now. Jobless claims remain near multimonth lows, the number of job openings (JOLTS) remains above pre-pandemic levels, and the monthly job adds, while off the heady levels of earlier this year, remain healthy. The only “bad” jobs metric we have right now is Continuing Claims, which rose to levels last seen in April and hints that unemployed people are having a more challenging time finding work. But that one metric isn’t enough to change the fact that the labor market remains strong. What signals a hard landing? Claims moving above 300k within six weeks or job adds falling towards 0 in the next three months.
The bottom line is: that the Scoreboard shows some loss of positive momentum in the economy, but it still clearly points to a soft landing over a hard one. This analysis does not mean a hard landing won’t happen, as the longer rates stay high, the more of a headwind they’ll place on growth (remember, it took years of high rates to create the last two recessions). But so far, it isn’t happening, and that’s keeping the “soft/no Landing” pillar of the rally intact, which should keep any pullbacks (like we saw in late October) in check.