Neil Dutta and Conor Sen on the Chances of a US Soft Landing

Episode Summary

Executive Summary: Odd Lots examines whether 2023 will bring a soft landing, recession, or stagflation. Guests Connor Sen and Neil Dutta argue recent data favor soft landing bulls: strong payrolls, easing inflation, improving supply chains, and falling rents. But they differ on whether a 3.5% unemployment rate can coexist with sustained disinflation, and whether the Fed will trust the data enough to stop tightening.

Main Topics: Soft landing vs. recession vs. stagflation (Priority: 5/5): The hosts frame the macro backdrop as unusually uncertain, with legitimate arguments for recession, stagflation, or a soft landing. Recent payroll and inflation data revived hopes that the Fed could slow without triggering a collapse. Fed messaging and labor market focus (Priority: 5/5): Neil and Connor argue the Fed is intentionally keeping financial conditions tight and focusing on labor-market weakness as the transmission channel for inflation control, even though actual data have improved. Inflation is easing for non-Fed reasons (Priority: 5/5): A major theme is that inflation is falling because of supply-chain normalization, lower gas prices, and declining rents—not necessarily because monetary policy has fully worked yet. Rents, housing, and shelter disinflation (Priority: 4/5): Connor makes the case that rent growth could turn negative in 2023 due to excess apartment supply, waning household formation, and falling vacancy pressures, which could sharply lower core inflation. Hard data vs. soft data (Priority: 4/5): The conversation contrasts weak surveys and grim sentiment with still-resilient hard data on employment, spending, and production, arguing that many recession signals may be lagged or distorted. Manufacturing, inventories, and supply-chain normalization (Priority: 4/5): The guests see weakness in PMIs and manufacturing as mostly inventory correction and bullwhip effects, not a classic demand-driven recession, with potential for improvement as the year progresses. Global spillovers: China, Europe, and the dollar (Priority: 3/5): China’s reopening is discussed as a possible boost to global demand, a drag on the dollar, and a tailwind for Europe and other Asian economies, with implications for inflation and exports.

Key Arguments: Recent payroll data support the soft landing thesis because employment remains strong while wage pressure has eased. The unemployment rate at 3.5% is too low for the Fed to confidently declare inflation defeated, limiting the odds of near-term cuts. Inflation is likely to fall further in coming months due to technical factors like lower gas prices, used cars, and rents. Lower gas prices can shift consumer spending into other categories, creating relative price pressure elsewhere rather than reducing overall inflation automatically. Apartment/rental inflation may turn negative in 2023 because of excess supply, weaker household formation, and faster normalization in lease pricing. Survey data and PMIs are useful for momentum, but they often overstate turning points and are less reliable than hard data during rapid cyclical swings. Manufacturing weakness is more likely an inventory and bullwhip story than a deep collapse in investment or employment. If China’s reopening boosts global demand, it could weaken the dollar and raise imported inflation slightly while improving activity in Europe and Asia. The Fed’s emphasis on labor-market rebalancing suggests it may not cut rates even if inflation falls, unless unemployment rises materially. A soft landing with sub-2% core inflation is possible if shelter and goods inflation fall enough, but that does not guarantee rate cuts.

Data Points: Unemployment rate: 3.5% - U.S. unemployment was cited repeatedly as evidence that the labor market remains historically tight and inconsistent with a clear recession. Index of aggregate weekly payrolls: Just under 4% annualized over the last three months - Neil used this as a proxy for nominal income growth and a sign the Fed would be pleased with the pace. Fed end-2023 unemployment forecast: 4.7% - Connor noted the Fed’s projection looks far above current conditions and implies a much weaker labor market than the data show. Core goods inflation: Negative / already falling - Connor cited core goods disinflation as one of the drivers of lower inflation in early 2023. Market rents: Negative 3% annualized in Q4 2022 - Connor pointed to declining private rent measures as an early signal of future shelter disinflation. New leases on rentals: Negative in 2022 for the first time since 2009 - Connor used this to explain why rental inflation could keep easing as household formation normalizes. Apartments under construction: Twice as many as at the 2006 housing bust peak - Connor cited this as evidence of a large supply pipeline likely to pressure rents lower. U.S. auto sales annualized rate: 13.3 million in December - The discussion used this figure to show auto demand remains below pre-pandemic norms. Pre-pandemic auto sales annualized rate: ~17 million - Referenced as the prior benchmark for a healthy vehicle market. ISM services PMI: 49.6 vs. 55 expected - A weaker-than-expected services reading raised questions about the reliability of survey indicators. Core CPI scenario: Below 2% possible in 2023 - Connor argued that flat shelter, zero core goods inflation, and still-elevated services could still mathematically yield sub-2% core CPI. Potential household formation shock: Millions of households implied, not a specific number - The guests discussed how pandemic-era household formation is unwinding and affecting rents and capacity.

Pivotal Quotes: "“Until unemployment actually really starts jumping, the soft landing scenario can’t be disproven.”" — Joe Weisenthal / Tracy Alloway discussion: This captures the podcast’s core uncertainty: a soft landing remains plausible while labor markets stay strong. "“The news today was good for the soft landing bulls.”" — Neil Dutta: Neil’s immediate read on the payroll and wage data was that it favored a milder macro outcome. "“I think rent growth is going to be negative in 2023.”" — Connor Sen: Connor’s most concrete forecast, central to his view that inflation can fall quickly without a deep recession.

Implications: Listeners should expect a volatile 2023 where inflation may cool faster than recession fears justify. If rents and goods prices keep falling, the Fed may appear behind the curve on disinflation but still refuse to cut until labor markets weaken meaningfully.