MacroVoices #388 Lakshman Achuthan: Recession Still On Deck

Episode Summary

Executive Summary: Macro Voices Episode 388 centers on Lakshman Achuthan’s view that the U.S. may already be in recession, despite resilient risk assets and delayed confirmation in lagging data. He argues the slowdown is cyclical and likely to pressure markets, while also outlining structural forces—weak productivity, onshoring, tight labor supply, and energy constraints—that could support a new secular inflation regime once the downturn passes.

Main Topics: Recession may already be underway (Priority: 5/5): Achuthan argues the recession call remains intact and that it is normal for recessions to be recognized only in hindsight, since GDP and jobs data are revised materially around turning points. Why the market has not yet broken down (Priority: 5/5): The hosts discuss the disconnect between bearish macro calls and the strong rally in equities. Achuthan says bear-market rallies can be large and persistent, especially around recessionary periods and after heavy post-COVID distortions. Cyclical evidence of economic slowdown (Priority: 5/5): ECRI’s leading and coincident indicators point lower in services, labor conditions, investment, China industrial production, and global PMIs, suggesting broad recessionary pressure is building even if headline data remain mixed. Inflation: transitory shock vs. secular regime (Priority: 5/5): Achuthan separates the recent supply-chain inflation shock from a possible longer-run inflationary backdrop driven by weak productivity, onshoring, constrained labor supply, and energy limits. Rates, credit, and lagged Fed tightening (Priority: 4/5): The interview highlights that the Fed’s aggressive hikes are only now fully filtering through the economy, and that credit tightening is likely to emerge through mortgages, autos, and private lending rather than just headline bank failures. Post-game market and technical levels (Priority: 4/5): The post-game analyzes crude oil, SPX, Nasdaq, VIX, USD, gold, Treasury curve, and Euro Stoxx levels, with the main tactical takeaway being that risk assets remain vulnerable even though some breakouts are still unconfirmed.

Key Arguments: Recessions are usually recognized late because the defining data—output, employment, income, and sales—are revised after the fact; a negative GDP print is not required to be in recession. The current risk-asset rally does not invalidate a recession call; large bear-market rallies are normal, especially in distorted post-COVID conditions. Forward-looking cyclical indicators in services, labor, investment, China, and global PMIs are deteriorating, implying downside cyclical risk remains dominant. The lagged effect of the Fed’s rate hikes is now starting to hit the real economy, and credit contraction typically follows cyclical downswings. Recent inflation may have been mostly transitory, but structural forces could create a higher inflation floor after the cycle troughs. Weak productivity, reshoring/onshoring, tight labor supply, and potential energy constraints are all inflationary structural factors. The key test for secular inflation is whether the next inflation trough is higher than prior pre-COVID troughs, similar to the 1970s pattern. China’s reopening did not deliver the expected global demand impulse; its industrial cycle remains weak and may be reflecting geopolitical and supply-chain realignment. A recession or hard landing would likely cap inflation near term, but would not settle the longer-term secular inflation question. Credit stress can show up in ordinary borrowing conditions before a classic banking crisis, via mortgage rates, car loans, and private-credit tightening.

Data Points: Episode number: 388 - Macro Voices episode discussed in the transcript Production date: August 10, 2023 - Episode production date stated in the intro SP 500 futures: Down 115 points to 4,485 - Week-over-week scoreboard as of Wednesday, August 9, 2023 U.S. dollar index: 102.47, down 13 bps - Scoreboard update ahead of inflation releases WTI crude oil (Sep contract): 84.44, up 618 points - New 2023 high cited in the scoreboard Gold: 1,950, down 127 bps - Scoreboard update; advance stalled Copper: 378, down 156 bps - Scoreboard update; weak industrial signal U.S. 10-year Treasury yield: 4.01%, down 7 bps - Scoreboard update after prior 4.20% high EIA crude inventory change: +5.9 million barrels - Weekly U.S. crude inventory build discussed in the post-game Strategic Petroleum Reserve refill: 1 million barrels - Noted as a surprise government purchase/refill Cushing inventory change: +159,000 barrels - Small build after prior drawdowns Gasoline inventory change: -2.7 million barrels - Weekly EIA data Distillate inventory change: -1.7 million barrels - Weekly EIA data U.S. crude production: 12.6 million barrels/day - New post-pandemic record cited by Eric SPX spot level: About 4,470 - Nick’s options/technical overview SPX call wall: 4,550 - Options positioning and resistance level SPX put wall: 4,400 - Options positioning and support level SPX implied move for Aug 18 OpEx: ±80 points - Options market expectation QQQ spot level: About 369 - Nasdaq/Triple Q discussion QQQ call wall: 380 - Options positioning and resistance level QQQ put wall: 365 - Options positioning and support level QQQ implied move for Aug 18 OpEx: ±10 points - Options market expectation VIX: About 16 - Interpreted as roughly 1% daily broad-market moves Gold futures contract spread: About $40 discount in August vs December - Eric notes the roll creates chart distortion Consumer spending as % of GDP: Nearly 71% - Achuthan cites near all-time high consumption share Industrial investment as % of GDP: Falling sharply - Used to argue business investment is weakening despite factory-build headlines U.S. recession recognition lag: First negative GDP print in Great Recession came later in 2008 - Illustrates that recession is usually recognized after it begins Temporary jobs growth: About 6% decline - Achuthan cites weakening cyclical labor conditions Euro Stoxx 50 resistance: 4,400 - Post-game technical level; failed breakout earlier in the year

Pivotal Quotes: "I think so. If in fact, it's not already here." — Lakshman Achuthan: Answering whether the expected recession is still coming "It is normal for recessions to be recognized in the rearview mirror." — Lakshman Achuthan: Explaining why current data may not yet show a clearly labeled recession "The tell is going to be where does the inflation cycle bottom before it begins to reaccelerate in a pronounced, pervasive, and persistent way?" — Lakshman Achuthan: Describing how to judge whether a new secular inflation regime is forming

Implications: Listeners should treat current resilience in markets and headline data cautiously: cyclical weakness may be deeper than reported, while structural inflation risks could reappear after the downturn. Tactical positioning favors risk control, with close attention to oil, yields, and equity support levels.