MacroVoices #402 Lakshman Achuthan: A Soft Landing Still A Dream

Episode Summary

Executive Summary: In Macro Voices Episode 402, host Eric Townsend interviews Lakshman Achuthan, co-founder of the Economic Cycle Research Institute (ECRI). Achuthan reiterates his hard-landing recession call despite the recent stock market rally. He presents ECRI's leading indicators showing growth continues to slow, inflation remains sticky, and global trade is weakening. Achuthan argues that labor hoarding, education/health job resilience, and flat forward inflation gauges contradict soft-landing narratives. The post-game analysis covers crude oil weakness, equity short squeezes, and a weaker dollar, with hosts expressing skepticism about the sustainability of recent market exuberance.

Main Topics: ECRI's Hard Landing Recession Call (Priority: 5/5): Achuthan maintains that a recession/hard landing remains on deck despite recent equity rally and GDP print; leading indicators still point to cyclical weakness. Labor Market Divergence & Labor Hoarding (Priority: 5/5): Jobs growth is concentrated in non-discretionary education/health sectors; discretionary job growth is weakening. Managers are hoarding labor due to past hiring difficulties, delaying firings. Sticky Inflation & Forward Inflation Gauges (Priority: 5/5): ECRI's forward-looking inflation indicators have flattened, suggesting actual inflation will be stickier than markets expect. Disinflation progress may stall. Global Trade & China Weakness (Priority: 4/5): ECRI's 21-country long leading index predicts ongoing world trade contraction. Chinese data may be unreliable but directional cyclical signals show no robust recovery. Post-Game Market Analysis (Crude Oil, Equities, Dollar) (Priority: 4/5): Hosts analyze crude oil bearishness (failed rally, inventories building), equity short squeeze (SP 500 +10.2% in 12 days, overbought), and dollar decline. Skepticism about CPI-driven exuberance. Geopolitical & Structural Inflation Drivers (Priority: 3/5): Geopolitical conflicts, onshoring, defense spending, and deficits create structural inflationary pressures. Short-term uncertainty may slow cyclical activity but longer-term pressures remain.

Key Arguments: GDP alone does not define recession; a coincident index of output, employment, income, and sales shows slowing, not reacceleration. The gap between discretionary and non-discretionary job growth (education/health) is a classic recessionary pattern, obscured by labor hoarding. Forward-looking inflation gauges have been flat for months, implying underlying inflation pressures are not easing, contradicting hopes of a rapid decline to 2%. The 21-country long leading index is at near two-year lows, predicting further declines in world trade and global activity. The recent CPI miss (0.1%) does not guarantee the end of rate hikes or imminent cuts; declining inflation could be recession-driven, not a soft landing. Black market oil bypassing sanctions explains official supply/demand mismatches and analyst forecast errors in crude markets. Structural factors (onshoring, defense spending, deficits, weak productivity) point to a new era of higher inflation cycles, even if cyclical troughs touch 2%. Recent equity rally is a short squeeze, not a fundamental re-acceleration; key technical levels (SP 4612, NASDAQ 399) are untested, and overvaluation is a concern.

Data Points: US GDP Q3 print: 4.9% - Initial estimate; Achuthan notes it masks broader cyclical weakness in coincident index. SP 500 futures week-over-week change: +273 bps to 4519 - Short squeeze rally, up ~10% in just over two weeks. US Dollar Index week-over-week change: -108 bps to 104.38 - Continuing pullback after Q3 advance. WTI crude oil January contract change: -75 bps to ~$70 - Failed rally at 13-day MA; near 200-day MA support at $76.18. Gold December contract change: +31 bps to $1964 - Above 200-day MA ($1949) but failed at 13-day MA; needs close above $1982 to confirm uptrend. US 10-year yield change: +3 bps to 4.53% - 50 bps off October highs. CPI print miss vs consensus: 0.1% - Achuthan and hosts argue this is insufficient to guarantee dovish pivot or mission accomplished on inflation. Education & health jobs vs nonfarm payrolls: Gap widening - Non-discretionary job growth holds up; rest of job growth deteriorating rapidly – classic recessionary pattern. Wage growth: ~5.25% - Stuck at this level for months after falling from 6%+; still above Fed comfort zone. Forward-looking inflation gauge (ECRI): Flat trend - Underlying pressures not falling; points to stickier actual inflation for at least several quarters. 21-country long leading index level: Near two-year low - Predicts further decline in world trade and global activity; no external bailout for US. EIA crude inventory build: +3.6 million barrels national; +1.9 million at Cushing - Gasoline -1.5M, distillates -1.4M; production unchanged at 13.2 mb/d. WTI time spread (3rd month): $0.03 backwardation - Near contango; indicates potential larger bearish move if entire curve turns contango. NASDAQ Qs implied move to Dec 15 OpEx: +/- 14 points; upper ~399, lower ~371 - Near all-time highs (408); overvalued names and NVIDIA earnings next week are key risks.

Pivotal Quotes: "I think it is. Thanks for having me back. But I think it still is on deck." — Lakshman Achuthan: Achuthan confirms his hard landing recession call remains unchanged despite the stock market rally. "I think the main reason the coincident index hasn't gone negative is because of the jobs component, where there's been a great deal of labor hoarding." — Lakshman Achuthan: Explains why the economy hasn't officially entered recession despite leading indicators weakening for over a year. "Our forward-looking indicators of inflation have been pretty much flat this year. That should put a damper on hopes of a faster decline in inflation." — Lakshman Achuthan: His core argument against the soft landing and rapid disinflation narrative. "I think the market is really reading a lot more into this than actually happened. One print doesn't make a new trend, and nothing ever goes in a straight line." — Eric Townsend: Host's commentary on the overblown reaction to the 0.1% CPI miss; notes declining inflation could signal recession.

Implications: Investors should not extrapolate the equity rally as a signal of economic reacceleration. Hard landing and sticky inflation risks remain elevated. Focus on cyclical leading indicators over backward-looking data. Expect continued volatility in crude, potential dollar consolidation, and gold testing key resistance levels. Overvalued tech names are vulnerable. Diversification and defensive positioning remain prudent.