Watching Paint Dry is up there with hugging a tree, which my mom, a Master Gardener, does often. The process came into vogue when environmentally friendlier water-based paint replaced solvent-derived paints and coatings. We “watch” to better understand how aqueous material dries on surfaces to form a protective layer… “Riveting?” If we’re boring you in our best Ben Stein voice, it’s by design. Colloquially, the phrase “watching paint dry” originated in the U.S. care of Geoffrey Warren. Writing for the Los Angeles Times in 1959, he opined that a theatrical presentation of The Shrike was “as exciting as watching paint dry.” A decade on, popular sports announcer Red Barber warned that, due to the dominance of pitchers over batters, baseball too had become “as exciting as watching paint dry.” Federal Reserve officials unwittingly added the element of irony to the expression. When first describing Quantitative Easing (QT), they suggested it would be like baseball circa 1969. Instead, QT was akin to watching overheated paint explode, elevating the phraseology to new levels. In 2012, online trade merchants hosted the inaugural World Watching Paint Dry championships to promote various paint brands. Pass the eyedrops!

Bankruptcy cycles tend to fit the cliché. Oscillations are low making turning points difficult to pinpoint. Post-trough, so long as the rise is orderly, financial market participants take one glance and yawn. Since filings are lagged by a quarter, these cyclical fundamentals don’t make many waves.

The Great Recession onset was an exception — both Chapter 11 filings (i.e., reorganization to stay in business and repay creditors) and Chapter 7’s (i.e., liquidation with asset sales to pay creditors) rose sharply. As the 2010s expansion matured, business filings fell on-trend. The COVID-19 shock generated divergent paths – Chapter 11s rose (orange line) and Chapter 7s fell (green line). The economy was backstopped but credit issues weren’t completely avoided. Post-pandemic, per Bloomberg, both have risen steadily through 2024’s second quarter.

Paywalled Epiq data tally U.S. bankruptcy on a monthly basis. Last Friday’s release showed Chapter 11 commercial bankruptcies skipped higher in 2024’s first nine months — the cumulative 6,067 Chapter 11s through September represented a 36% increase over the 4,561 filed during the same period in 2023. Vice President Michael Hunter sees no end in sight: “As we close out the third quarter in 2024, we continue to see a steady increase in both individual and commercial filings this year to date. The recent Fed rate cut…spurred by slowing job gains and an increase in the unemployment rate leads me to believe the steady increase in those seeking bankruptcy protection will continue through 2024 and into 2025.”

Data on labor underutilization provide a macroeconomic cross-check. Since bottoming in 2022’s fourth quarter, the U-6 underemployment rate, which sums the unemployed and marginally attached to the labor force with those working part-time for economic reasons, has risen alongside the uptick in Chapter 11s and 7s (purple line). The third quarter jump to 7.8% from the second quarter’s 7.4% was a significant leap that underlines a household income shock. While it doesn’t appear overly alarming, underemployment’s four-tenth advance was the largest of the current cycle. Parallel first instances in previous cycles occurred in 2001’s and 2008’s respective first quarters.

Personal bankruptcies naturally lag those that are commercial in nature. From Epiq: “The 19,793 individual Chapter 7 filings in September 2023 increased 14 percent over the 17,320 filings in September 2022, and “the 24,096 individual Chapter 7 filings in September 2024 increased 22 percent over the 19,789 filings in September 2023.” Creditworthiness of the household sector is very much in focus based on the pickup in individual liquidations that expunge most debts. With the quickening in the rise in the unemployment rate in this year’s second and third quarters (blue line), the trend in personal bankruptcy filings (yellow line) is at risk of an echo acceleration in coming quarters.

In isolation, the bankruptcy cycle justifies continued Fed easing. Tack onto the discussion the scourge of labor market scarring and the debate should still be whether the next move is 25 or 50 basis points. The 59% annualized advance in long-term unemployment in the two quarters ended September 30th (red line) has no false signals in business cycles since 1970. Slack through the end of the quarter was even worse, with September’s six-month annualized gain at 71% (red marker).

Banks are keen to household balance sheet risks. The Fed’s weekly H.8 commercial bank asset and liabilities report last Friday showed allowances for loan and lease losses continuing to rise through September (teal line). Not surprisingly, the series bottomed around the same time as the bankruptcy cycle.

Banks likely are wary of losses not just from turns in the bankruptcy and labor cycles, but also from the composition of the consumer loan book. A simple ratio of credit cards to total consumer loans via the H.8 has been moving up and to the right since bottoming in 2021, after stimulus monies dried up. At present, discretionary credit cards — debt with the highest rates of interest vis-à-vis other household loan vehicles — account for 56% of total consumer loans (fuchsia line). A continuation of such a trend likely would keep additional reserves flowing into loan loss buckets. Watching this paint dry is a luxury time will not afford.

“Overdubbing” is used widely in musical production by singers, solo instrumentalists, ensembles and orchestras. The technique adds richness and complexity to the original recording, converting it into a ‘big’ sound, one that mimics many performers. Overdubbing took one of Billy Joel’s biggest hits to new heights. “Don’t Ask Me Why” was the fourth single from his Glass Houses album and features a 15-layer piano overdub in the tune’s midsection. Besides the overdubbing, the Latin-infused hit includes handclaps, maracas and castanets, and even rat-a-tapping high-heeled shoes for bigger bigness. Songfacts.com explained that Joel and his producer Phil Ramone were brainstorming percussion ideas to give the song’s bridge a Spanish flavor when Joel noticed that Laura Doty, the studio’s receptionist, was wearing shoes with high heels. He asked to borrow them and used them to tap out the flamenco-style rhythm – with his hands – on a table in the lobby of A&R Records. The musical world is forever indebted to Ms. Doty.

The furious tapping heard across Wall Street on Friday emanated not from pianos, but rather keyboards. Call it the Bull’s Serenade. Brandishing a 245,000 month-over-month (MoM) gain, nonfarm payrolls blew past all comers in Bloomberg’s survey, and came in nearly 100,000 north of the 150,000 consensus. Add in the prior two months’ upward revision of 72,000 and the headline equated to a 326,000 advance. The one-tenth decline in the unemployment rate and upside to average hourly earnings added to good news. Stocks and the U.S. dollar rallied, while Treasuries sharply bear flattened as futures markets completely priced out a half-point move for November. Even out-of-consensus calls for the Fed to pause rate cuts surfaced after the market closed.

In unsolicited fashion, QI mentor Dr. Lacy Hunt’s thoughts found their way to the inboxes of Danielle and Dr. Gates, injecting an element of perspective: “The workweek fell to 34.2, the lowest level of the year. The workweek and the payroll gains are very contradictory because the decline in the workweek is equivalent to a loss of 300k payroll jobs.” QI friend and preeminent labor market guru Philippa Dunne added a triple dose of color beyond the 14-year low in the workweek:

1. The workweek was in the 9th percentile of all months since the all-worker series began in 2006. Aggregate hours were off 0.1%.
2. Payrolls seasonal adjustment was the biggest for this month since 2002.
3. More than all of August’s upward revision was attributable to government jobs, i.e., private payrolls were revised

“Why were payrolls so strong?” In a word – “consistency.” Dissecting the private sector, education and healthcare was the largest gainers in September…and August, July, June, May, April, March, February and January. In fact, thus far this year, these two areas accounted for about 50% of all private sector job creation and more than half for gains for workers (see table). Why the resilience? Because going to school or college and to the doctor or dentist is what we call “life,” no matter where we are in the business cycle.

Looking across economic history, education and healthcare’s share of private payroll job gains have been at or above 50% since 2023’s fourth quarter (blue line). Crossing this threshold marked a significant milestone in the expansions of the 1980s, 1990s and 2000s. The contributions by these two jumped further as recession ended those respective expansions. For completeness, there was one false signal in 2004’s first quarter, but it faded. Duration above 50%, though, is the difference between the current episode and that one.

Here’s the rub. Why did the education and healthcare share drop sharply in recession? Because these industries kept adding headcount as the balance of the private sector was reducing headcount (positive numerator of education and healthcare/negative denominator). Future gains in RECESSION PROOF sectors won’t tell us about the broader underlying condition of the U.S. labor market.

Recession-proof industries are masking cyclical weakness, which is most visible in durable goods manufacturing, which is sporting the biggest losses year to date (table). In fact, the nine consecutive declines in durable manufacturing factory worker employment in 2024 (totaling -85,000) matched similar losing streaks in 1982, 1985, 2001, 2002, 2003, 2008 and 2009 (recession years bolded). The information sector — tied to advertising revenues, a GDP indicator – was the second largest loser on the worker side; mining came in third. On the manager side, additional cyclical pressure was evident in retail, nondurable manufacturing and wholesale, while financials also indicated cumulative declines.

A long look back at the worker-manager (W-M) payroll spread confirms our belief that firms are favoring capital over labor. Smoothing the noise in the W-M spread for the private sector ex-education and healthcare revealed a -20,000 quarterly drop in 2024’s third quarter. Without flashing a single false signal, inversions such as these have flagged recession in every cycle since the 1970s – without false signals (red line).

Aggregate hours worked combines jobs and weekly hours for the labor input that underwrites economic activity. In the third quarter, the entire quarter-over-quarter (QoQ) annualized gain in nonfarm private aggregate hours worked (0.23%) was accounted for by education and healthcare. Without them, hours worked fell relative to the second quarter at a marginal -0.03% QoQ annualized rate (purple line). Any decent gain in third-quarter GDP will have to be underwritten by productivity. Good thing the ISM Services survey indicated just that.

For the Federal Reserve, it would be a mistake to take the strength in private payrolls at face value and pause its easing campaign. Monetary policymakers’ asymmetric response to labor risks should delve below the headlines and acknowledge recession-proof industries are generating a material amount of complacency in financial markets. At this point of the cycle, putting too much weight on aggregate measures of employment is the equivalent of Billy Joel crooning “Don’t Ask Me Why.”

Texans own Friday Night Lights. I’ll concede that there are others who hold their own as evidenced in the National High School Hall of Fame. Some of it’s a matter of numbers. With a population of 39 million, it stands to reason that California has 23 inductees compared to Texas (population 30 million with 20 inductees). In that I happen to be in Buford, Georgia, on the occasion of a family mausoleum interment, on a Friday, I’ve been (politely) reminded that (they believe) football is bigger here than anywhere. The history is storied. Coach Ed Cochran arrived in Buford in 1973. On an icy night in December 1978, Buford High defeated Charlton County 7-6 marking the school’s first State Championship. His successor, Coach Dexter Wood, was head coach from 1995-2005. He was inducted into the Georgia Athletic Coaches Association Hall of Fame on May 30, 2015. During his time in Buford, he clocked 118 wins and 17 losses in ten seasons. Coach Wood’s Buford football team broke the Georgia High School Association’s state record for most consecutive wins at 47 over a four-season period. As far as Texas and beyond, Wood is the stuff of legend.

Federal Reserve Chair Jerome Hayden Powell commands the same Godlike status on Wall Street as Wood did on the Georgia gridiron. So sure were the bubbleheads on bubblevision Thursday morning about the strength of the job market, as evidenced by initial jobless claims, they demanded of one guest after another why they dared characterize what’s to come as a “landing” of any ilk. Odds are, they insist, that there will be no landing at all. Accepting this premise only requires that you leave objectivity at the door. Unless history can be dismissed, which is increasingly demanded to our immense insult, the sum of the number of continuing claimants and part-time laborers is already recessionary. We expect nothing but more of the same this morning – a bloated and bloviated Birth/Death adjustment piled on to the technicality of multiple job holders’ multiple jobs being counted as if it was more than one person working said jobs. The good news is we’ve become immensely accepting of fiction in first prints.

As for the nonfiction genre, the percentage of Americans who are aware of incoming job losses…all over again…is growing numb. Welcome to the third wave of layoffs since late 2022. On a population basis at the state level, initial claims have pivoted led by large states making up a bigger share of the rising year-over-year (YoY) trend. State initial claims breadth rose to 70% in September from 28% in August (light blue line). This move broke a downtrend in place since late 2023 as California, New York, New Jersey, Michigan and North Carolina drove the shift. Bouncing off a 50% low in August to 55% in September, state continuing claims breadth will follow (lilac line).

Prior to claims hitting the tape, Challenger painted a rosy picture despite job cut announcements posting a 53.4% YoY increase in September, well north of August’s 1.0% YoY advance. Challenger postulated that “we’re at an inflection point now, where the labor market could stall or tighten.” Really? The labor market is finished loosening in the current cycle on the word of an outlet that press-released a chart depicting the August/September onset of a definitive third layoff wave.

Challenger’s tally of hiring plans couldn’t be glossed over. Since 2012, plans have ramped ahead of the holiday shopping season. And then there’s 2024: “For the year, employers have announced plans to add 483,590 jobs, down 33% from the 726,333 announced hiring plans through September 2023. These are the lowest YTD hiring plans since 2011 when employers planned to add 300,794 jobs through September.” A rewrite of the last sentence follows: “These are the lowest YTD hiring plans since the year-end seasonal economy emerged in 2012.”

Back at the soft-landing camp, ISM Services Business Activity rose 6.6 points to 59.9 while New Orders ticked up by 6.4 points to 59.4 in September. The former was the second-highest reading in two years, while the latter leapt to a 19-month high. Covering about 90% of the economy, the survey flagged a strong jump-off point for the fourth quarter. The only impediment to this happy conclusion: The ISM Services Employment index re-contracted to 48.1 in September, the 7th of the last 10 months in the red since December.

The difference between New Orders and Employment proxies economywide productivity. In September, this figure vaulted to 11.3, a three-year high (orange line). In periods of economic stress, businesses choose capital over labor. Stated differently, employers’ economic interests trump employees’ basic needs; in turn, managers are favored over workers. The surge in the spread validates the un-inversion in the yield curve (purple line).

Backing out, capex cycles (green line) explain their labor cycle counterparts (red line). Since the 1992 core capex series’ inception, there have been five peaks – September 2000, April 2008, September 2014, May 2019 and January 2024 (yellow bars). The three cases of 2000, 2008 and 2024 run parallel to one another because the unemployment rate had already bottomed before capex shipments topped out. No matter what happens to nonfarm payrolls this morning, the risk for slower job growth and higher unemployment remains the base case as corporations rationally prioritize the protection of margins. Call it the Friday Night Lights effect on Nonfarm Payroll Friday.

Why would Perfection reward putting a square peg in a round hole…as a clock ticks down? The capitalization refers to the fact that Perfection is a game. The metaphor’s bolding denotes it predating of the game’s 1973 release by more than a century. The turn of phrase was first penned by Sydney Smith in “On the Conduct of the Understanding,” one of a series of lectures on moral philosophy that he delivered at the Royal Institution in the early 1800s. Smith used it to describe the unusual individualist who could not fit into a niche of their society: “If you choose to represent the various parts in life by holes upon a table of different shapes – some circular, some triangular, some square, some oblong – and the person acting these parts by bits of wood of similar shapes, we shall generally find that the triangular person has got into the square hole, the oblong into the triangular, and a square person has squeezed himself into the round hole. The officer and the office, the doer and the thing done, seldom fit so exactly, that we can say they were almost made for each other.”

The ADP employment report, as initially conceived, provided an early, and hopefully accurate, read on private nonfarm payroll employment (NFP). But ADP has had a rocky relationship with the Street. On more than one occasion, it’s lost its credibility of clairvoyance. While few would have given a second glance at this detail before systematic downward revisions to the Bureau of Labor Statistics nonfarm payrolls (NFP) prints became an ingrained feature in 2022, ADP was designed to mirror the fully benchmarked vintage NFP series that incorporates all necessary adjustments from the Quarterly Census of Employment and Wages (QCEW).

In that it’s jobs week with the investing world hyper-focused on the Federal Reserve’s next move, yesterday’s upside surprise in ADP’s headline garnered more attention than usual during a dead quiet day on the U.S economic calendar. The 143,000 gain for September beat the consensus forecast 125,000. And August was revised up slightly, to 103,000 from 99,000. Bloomberg’s NFP whisper number was 138,000 prior to ADP hitting and edged up ever so slightly by day’s end, to 142,000. Friday’s NFP consensus stands at 150,000.

Digging deeper, ADP’s not seasonally adjusted (NSA) month-over-month (MoM) change in September was anything but a beat — the -260,000 MoM decline was the largest month since the series’ 2010 inception. On average, September’s NSA performance was 9,000. Why was the raw data not echoed in its seasonally adjusted counterpart? We’re not going to answer that.

At the risk of being overly cryptic, we assure you that ADP isn’t worthless. There’s a lot going on under the hood (see table). Some industries that have topped out per ADP includes Natural Resources & Mining in July 2023, Manufacturing in February 2023, Information in December 2022 and Professional & Business Services in January 2023. In parallel fashion, the corresponding NFP level for these industries peaked in September 2023, January 2024, November 2022 and May 2024, respectively. Two sources telling the same story carry more weight than one. (The NFP version of “other” services is a couple of months past the June 2024 apex, while ADP hasn’t gotten there yet.)

Aggregated with ADP’s seasonally adjusted upside, this week’s JOLTS flagged the odds of an upward revision to August NFP. The nonfarm hires-separations spread advanced to 320,000 in August (aqua line), well north of July’s 102,000 and NFP’s initial 142,000 read (lilac line). MacroEdge’s job cuts tracker dropped off noticeably last month and stands as corroboration. September’s count of 50,355 was about half August’s 100,581 tally and the 99,000 average from May to August.

We wish we could say that MacroEdge’s cooling sets up downside to Challenger’s September job cuts that open today’s data docket. But Challenger’s become anything but predictable.

ADP’s seasonally adjusted upside defied its read on wages: “Year-over-year pay gains for job-stayers fell slightly in September at 4.7%. For job-changers, the decline was greater, falling from 7.3% in August to 6.6%.” Since ADP began tracking in 2021, the 1.9 percentage point (pps) spread was the smallest over its limited history and took out February’s 2.0 pps, which was a far cry from May 2022’s 8.8 pps wide (yellow line). The Atlanta Fed’s (ATL) wage growth tracker validates dissipating wage growth as the job switchers-job stayers spread fell to 1.1% in August on a 12-month moving average (MMA) basis, a cycle nadir (red line). Tellingly, ATL’s 3-month MMA spread has compressed more quickly. August’s -0.1 percent inversion was the first since 2018. In past cycles, the dive into negative territory also heralded a period of higher unemployment within six to nine months.

An extended bankruptcy cycle ups that ante. The National Association of Credit Management’s (NACM) Credit Managers’ Index’s combined manufacturing/services bankruptcy filing metric has been worse-than-normal for a record eight straight quarters. While the magnitude is not as severe as the Great Recession, the eight-quarter string matches its duration, exceeding the seven-quarter periods of the 2015-16 industrial recession and the back-to-back shocks of the U.S./China trade war and COVID-19.

Additional layoffs are in the offing. While the level of initial jobless claims has eased, the flow has not (orange line). Bankruptcies will underpin the short-run trend and bleed into an acceleration in continuing claims, hammering a square peg into a square hole (purple line).

Tragedy (almost) redefined: Queen’s bass player John Deacon’s iconic two-note bass riff in the 1981 hit “Under Pressure” came very close to not making it on the track. As explained by drummer Roger Taylor in Queen’s Days of our Lives documentary, after Deacon came up with the riff, the band went out for a bite to eat in Montreaux, Switzerland where they were recording. Upon returning, Deacon’s has exorcised itself of the brilliant riff. It was Taylor’s ability to recall that saved the day and indeed, the song. To Taylor’s credit, “Under Pressure” soared to Queen’s second No. 1 hit in the U.K. after the musically irreplicable “Bohemian Rhapsody.” Robert Matthew Van Winkle would one day be forever indebted to Taylor. Known professionally as Vanilla Ice, the American rapper replicated the hit’s bassline for his No. 1, 1990 smash hit “Ice Ice Baby.” As the hands of justice deemed fit, that Vanilla Ice did not initially credit Bowie or Queen failed. The subsequent lawsuit awarded Bowie and Queen songwriting credit and royalties forevermore.

As you’re aware, geopolitics jumped up the wall of worry yesterday, pressuring risk assets after Iran’s missile attack on Israel sent investors into a safe-haven stance. Uncertainty was compounded by the dockworker strike at ports from Maine to Texas. The disappointing September Institute for Supply Management (ISM) manufacturing index was icing on the cake.

Downward pressures were evident for the growth, inflation and labor pictures. While New Orders came in above market expectations, at 46.1 versus the consensus 45.0, they nonetheless posted the sixth straight reading below the 50 breakeven level, the 24th in the last 27 months. The persistence of disappointments on industrial activity generated the first contraction in ISM Prices index, which stumbled to 48.3 vis-à-vis the consensus 53.5. Moreover, at 43.9 versus the expected 47.1, the ISM Employment index plumbed south of the psychologically important 45 level for the second time in three months.

The duration of the compression in New Orders gave the soft-landing cavalcade a serious case of nerves. A clear double-dip pattern has evolved following the optimism reported earlier in the year. Continued weakness in New Orders likely will extend another month into the start of the fourth quarter. The culprit: the Customers’ Inventories index is a short-run leader of the leading New Orders series. Its guidance runs inverse to orders — lower is better and higher is worse. The September read of 50.0 (inverted yellow line) leaves us with trepidation for next month’s ISM. Orders are poised to slip under the 45-mark.

It’s a well-known fact that correlation increases between asset classes during economic downturns. The same can be said for Customers’ Inventories and New Orders. A look back over cycles since the late-1990s reveals divergence during the former and convergence during the latter. Convergence clearly has been on offer all year.

Manufacturing headwinds also were global in nature. The ISM Export Orders index downshifted to 45.3 in September from 48.6 in August and critically, the number of industries reporting growth in exports fell to two (or 11%, inverted lilac line) — Fabricated Metal Products and Food & Beverages, the latter of which is deemed as being an essential. This outlier was met with a retreat in export expansion internationally. The percentage of countries with export orders contracting in September rose to a nine-month high of 73%, according to a tally of S&P Global’s Purchasing Managers’ Indices (PMIs). With global trade in retreat, more open economies that rely on a greater share of activity from export and import flows could turn out to be short-run laggards to those that are more closed economies.

The sharp August and September volatility in the (regular) ISM inventories index spoke to procurement professionals sourcing inputs ahead of the coming port strike. However, given the persistent down draft from New Orders, the resulting -6.4-point plunge in Inventories, to 43, likely wasn’t driven solely by technical factors.

After the COVID-19 global supply chain disruptions, ISM industry breadth for Inventories overestimated the post-pandemic buildup and underestimated the subsequent normalization. The third quarter about-face saw one industry expanding supply in September – Petroleum & Coal products. This result was one of the weakest on record, rivaling the depths of the Great Recession.

To wit, the collapse in inventory breadth, measured in z-scores (red line) alongside the GDP measure of inventories (blue line), could generate a material supply adjustment before the year is out. In fact, the deterioration at the end of the July-September interval (red marker) raises the probability for a palpable fourth-quarter inventory correction. Such a risk is not consistent with orderly quarter-point rate cuts that glide into a “neutral” rate over time.

To be sure, there are many moving parts to GDP math, making it difficult for the forecasting community to accurately anticipate a significant inventory drawdown. On the labor front, however, Backlogs are a reliable harbinger for future employment. Manufacturing backlogs were south of the 45-threshold in the five months ended September (orange line). Capitulation for employment has indubitably arrived (purple line).

Into Friday’s jobs report, manufacturing payrolls are poised to remain under pressure. Per the ISM, “panelists cited continuing efforts by their companies to right-size workforces to levels consistent with projected demand” and “companies are continuing to reduce head counts through layoffs, attrition and hiring freezes.” Not to be left out, S&P Global’s final U.S. manufacturing PMI report noted that job shedding intensified as “employment decreased at the strongest pace since the start of 2010 if the COVID-19 pandemic period is excluded.”

Business survey guidance points to the possibility of a fifth consecutive monthly decline for ADP manufacturing employment today and a third time in the last four months for the official manufacturing payrolls data come Friday. Taking the under versus the -8,000 consensus is a prudent course of action.

Calculating the speed and position of a moving object is straightforward. We can measure a car traveling at 60 miles per hour or a turtle crawling at 0.5 miles per hour and simultaneously isolate where the objects are located. In the quantum world of sub-atomic particles, making these calculations is impossible given a fundamental mathematical relationship called the Uncertainty Principle. Formulated in 1927 by German physicist and Nobel laureate Werner Heisenberg, the Uncertainty Principle states that we cannot know the position and speed of a particle, such as a photon or electron, with perfect accuracy. The more we nail down the particle’s position, the less we know about its speed and vice versa. A rollercoaster serves as a real-life analogy for how the principle operates on a small scale. When the rollercoaster reaches its apex, we can take a snapshot and pinpoint its location. But the snapshot is absent information about its speed. As the rollercoaster lurches downhill, we can measure its speed but not its position.

The constancy of uncertainty is a feature of the dismal science. The ambiguity of economic forecasts is amplified with each marginal interval projected into the future, making fan charts a standard in central bank outlooks. Visibility for one quarter, maybe two, is the best we can expect.

Uncertainty’s fingerprints were all over Monday’s Dallas Federal Reserve manufacturing survey for September. In its Special Questions section, ‘domestic policy uncertainty (including national elections)’ was listed as Texas businesses’ primary concern in the next six months by 49.2% of respondents. Slicing the results three ways by the manufacturing, service and retail sectors complicates matters greatly.

For the manufacturing sector, the ‘level of demand/potential recession’ sat atop the worry wall as 63.2% of those polled outpaced the 56.6% plagued by uncertainty. For the service sector, uncertainty was number one at 46.8%, above the 42.6% citing recession as the primary concern. For the retail sector, recession was a bigger fear at 48.1% vis-à-vis uncertainty at 42.3% (see table).

To be sure, insecurity with respect to domestic policy and the election stems from the fate of taxes and regulation. Since the end of last year, this factor has ballooned as a future impediment to business. The volatility within services and retail is notable as polls surrounding the November outcome have swung markedly from the spring to the summer.

Election uncertainty aside, we were struck by the similarities across the Dallas Fed Manufacturing survey and the Chicago Purchasing Managers Index. The leading demand metrics of Backlogs and the New Orders-Inventories spread allow for a parallel evaluation. Smoothing these monthly series to quarterly averages added clarity to the signal. Through the lens of manufacturing output, industrial activity is on the mend. Thus far in the third quarter, excluding motor vehicles and parts, manufacturing industrial production averaged a 0.2% year-over-year (YoY) gain. After six straight YoY declines through 2024’s second quarter, this was the first sign of stabilization (blue line).

This won’t last. Texas factory sector Backlogs regressed from a six-quarter high of -4.6 in the spring quarter to -14.5 in the summer quarter, extending contraction to eight quarters (red line). The upshot: Less labor will be required for a given level of output. Little wonder nearly two-thirds of manufacturing execs are preoccupied with recession.

Moreover, the flash of optimism for production in the second quarter faded into the third. The New Orders-Inventories spread posted a 0.6 average in the second quarter, the first positive in nine quarters. Unfortunately, this is likely to be more aberration and less a trend shift – the third quarter relapsed to -6.5 (yellow line). The excess supply signals weaker growth, fewer labor needs and additional disinflationary pressure. Texas’ standing as top U.S. exporting state is not immune to the impairment in the industrial juggernauts of the world’s largest and third-largest exporting nations of China and Germany, respectively. There’s no dismissing the persistent contractions in both countries’ factory sectors.

The Chicago PMI echoed that of its Lone Star State counterpart. Backlogs have been mired in recessionary 30s reads for six straight quarters (orange line). The gap between anemic backlogs and the New Orders-Inventories spread widens as recession deepens. Unfinished business bodes poorly for Chicagoland auto production. No surprise, motor vehicles & parts industrial production has deepened at a rising pace as 2024 has progressed from 3.8% YoY in the first quarter to -1.1% and -5.9% YoY in the second and third quarter to date, respectively (purple line).

Stellantis can attest to the scourge of excess supply stretching into the summer quarter (olive line). Yesterday, the carmaker reported it will lower production and up incentive spending as it slashed its profit and cash flow forecasts. Bloomberg described Stellantis as “unique among European automakers in that its issues are mostly acute in North America.” Stellantis’s stock performance (STLA, lilac line) relative to its Big Three peers — General Motors (GM, teal line) and Ford (aqua line) – stands out as being even worse than that of Ford. After a spring that left the Big Three all up on the year, Wall Street darling GM has emerged the only gainer. At root is the incentive differential, with Stellantis at roughly $6,000 per vehicle in September, the sole player north of pre-pandemic highs, compared to Ford (~$3,500) and GM (~$2,100). Given the ubiquity of spending weakness across the Beige Book’s 12 Districts, we doubt the roller coaster has slowed enough to capture its speed.

In compiling the soundtrack for 1984’s Footloose, which Danielle memorized, screenwriter Dean Pitchford’s goal was diversity, which entailed recruiting seven co-writers and eight artists. Bonnie Tyler’s “Holding Out for A Hero” features in an intense scene where Kevin Bacon is playing a game of chicken on tractors with a local. A “hero” is born not by teenage bravado, but by mistake as his shoelace gets caught on a pedal. He couldn’t jump off, a.k.a., get his “foot loose.” Pitchford wrote this song’s lyrics with the mercurial Jim Steinman, who was responsible for most of Meat Loaf’s hits, including the epic “Paradise By The Dashboard Light.” When Pitchford sought out Tyler for vocals, no one at Columbia Records knew her whereabouts. Tyler’s A&R rep eventually tracked her to Nashville, where she’d signed with a country act. Paired with Steinman, the duo created musical magic. Pitchford recalled the demo to songfacts.com: “(Steinman) was just pounding the s–t out of the keyboard. Everybody was just grooving along as he’s pounding and this girl’s singing, singing, singing. And at the end of the whole thing, I looked over and there was blood up and down the keyboard. It cut his fingers.”

The fervor with which Steinman hammered the ivories captured onlookers’ perceived improvement in U.S. consumer sentiment through the end of September. Last Friday, the University of Michigan (UMich) noted that “consumer sentiment…ultimately (rose) more than 3% above August. This increase was seen across all education groups and political affiliations. Furthermore, all five index components gained, led by a 6% surge in one-year business expectations. The expectations index is now 13% above a year ago and reflects greater optimism across a broad swath of the population.”

No doubt, Federal Reserve Chair Jerome Powell is U.S. consumers’ hero. Between UMich’s September preliminary September 13 report and this month’s final on the 27th, the Fed slashed the overnight rate a larger-than-expected 50 basis points. The American public is keen to the long-awaited move, which is on display in the 51% gain in mortgage refinance volumes in the three weeks ended September 20, according to the Mortgage Bankers Association. This was the largest three-week advance since January and pushed the refi index to a two-year high. UMich revealed a majority 55% of consumers expect interest rates to fall in the coming year (light blue bars), the largest share on record since the survey’s 1960 inception. Certain demographics brandished greater awareness vis-à-vis the aggregate: 75% for the top third of the income distribution; 64% for those with a college degree and 61% for those aged 55 and over. As for regional standouts, count 58% in the Northeast and 56% in the West. A year ago, these metrics ranged between 10% and 20%.

This extraordinary reception gave a record share of Americans rate-cut euphoria. There have been five other times a 50%-plus majority of households indicated such strong conviction for the forward view on rates (in descending order): 54% in June 1980; 53% in March 1975; 52% in May 1980; 51% in March 1971 and 50% in December 1981. For context, four of these dates occurred inside recession, i.e., a surge in lower rate expectations does not necessarily herald financial market outperformance or good times ahead for the economy.

The VIX index (yellow line) is illustrative. Prior groundswells in lower rate expectations during the 2001 and 2007-09 recessions were a harbinger of higher equity volatility. While today’s buildup for rate expectations is abundantly clear, the subsequent surge in the VIX is absent. Jumps in lower rate expectations were also evident during 1998’s Long-Term Capital Management/Russia default episode and 2020’s COVID-19 shock.

Due to its low oscillating nature, the unemployment rate allows for an easier assessment over cycles (purple line). Lower rate expectations cleared the 40% hurdle in each of the last three economic downturns and proceeded to rise further before cresting. In each cycle, the unemployment rate rose gradually, then sharply and in a persistent manner after the elevation in rate expectations. Given we’re in the gradual phase, the present cycle is following the historical script.

We’re remiss to exclude the Institute for Supply Management’s (ISM) survey from our fundamental assessment. Over time, we expect noise. A consistent message emerges when supply-demand imbalances turn red and stay red. To that end, the bulge in lower rate expectations has accompanied a negative New Orders-Inventories spread (inverted red line). Recall, the S&P Global manufacturing PMI saw a widening in its corresponding figure for September which invites an echo in downside risk from August’s -5.7 New Orders-Inventories spread. As you know, this spread is hardwired into Wall Street’s equity strategists’ playbooks, reliably guiding corporate earnings and future S&P 500 performance.

In his latest Flow Show, Bank of America’s Michael Hartnett depicted numerous cyclical assets scaling their price action to an implied ISM level. At 62 and 61, respectively, Homebuilders and Semiconductors top the list (table). Compared to August’s ISM index at 47, these two flash fundamental overvaluation risks. Other sectors like Financial (59), Industrials (58), Real estate (57) and Materials (56) also stand out.

With ISM on tap tomorrow, should the September consensus (uptick to 47.6 from August’s 47.2) get it right, it would not change the relative value marker materially. Some tea leaves, though, suggest being mindful of the downside, which would make the bears the footloose heroes.

The Hallmark Channel has raised ‘rom-com’ to an artform. A hallmark of American film, romantic comedies are a proven staple for U.S. audiences. The perfected formula entails seven steps: 1) Start with a strong protagonist. Rom-coms feature a female lead who enjoys an aspirational career, feels life is not complete but is NOT looking for love; 2) Surround the protagonist with a supporting cast, one or two close confidants who provide counsel when needed; 3) Some incident which sets the action into motion – a break-up that sets her on a course to her love interest; 4) Create a compelling love interest. They don’t get along with her at first, but he complements her in ways not obvious she comes to realize; 5) Allow the couple to grow together over time. Throw the two leads together on a project, they work together and get closer, but fight attraction along the way; 6) Create confrontation by revealing the protagonist’s secret. Once revealed, a separation occurs, and all seems lost; 7) Save the kiss for last. The couple reconciles their differences, realizing they’re better together than apart. And finally, the seal of a kiss, which takes place in the very last scene.

One glance at Bloomberg’s U.S. calendar after Thursday’s 8:30 am releases hit, and you’d have thought the U.S. economy declared “The End” to its own Hallmark movie. Second-quarter real GDP growth was revised up to a 3.0% annualized rate on the third pass (above the 2.9% consensus), and initial jobless claims fell 4,000 to 218,000 in the week ended September 21^st (below the 223,000 consensus). Better-than-expected growth. Lower-than-expected layoffs. Seal it too with a kiss!

We found zero coincidence in the Hallmark Corporation’s home base of Kansas City, Missouri, the same Federal Reserve District that reported its manufacturing survey at 11:00 am on Thursday. Bucking the day’s trend, the Kansas City (KC) Fed Manufacturing headline index disappointed, falling to -8 in September from -3 in August, missing the consensus -5 estimate. September’s reading marked the 24th consecutive month of contraction.

Details under the KC headline flashed disinflation risks on both sides of the Fed’s mandate. In 2024’s third quarter, the current supply-demand imbalance plunged to the worst post-pandemic level. The -19 average for New Orders-Inventories only compares to the -24 average in 2008’s fourth quarter (light green line). Following the New Orders-Inventories spread into the abyss, the current employment picture also deteriorated sharply. The -10 average for Employment has no parallel outside recession (orange line). Growing excess supply and headcount reductions speak to the acute loosening in the region’s labor market, which encompasses the states of Colorado, Kansas, Nebraska, Oklahoma, Wyoming, 43 counties in western Missouri and 14 counties in northern New Mexico.

The post-pandemic collapse in the New Orders-Inventories spread, and subsequently employment, will combine to send core PCE inflation tumbling (purple line). A similar pattern emerged in the Great Recession, which strengthens our conviction our that inflation is fast approaching the Fed’s 2% target and at risk of breaching that threshold to the downside.

Back revisions from the GDP report also were revealing. Notably, real gross domestic income was revised up sharply to a 3.0% annualized rate in 2024’s first quarter from the 1.3% gain previously reported. According to the Bureau of Economic Analysis, “the leading contributor to the upward revision was compensation, based primarily on new first-quarter BLS Quarterly Census of Employment and Wages data.” In a curious divergence, this was the same dataset that showed a sizable downward revision to payrolls in the 12 months ended March 2024. On a two-quarter annualized basis, nominal GDP (read: the economy’s top-line revenues) is growing significantly slower than its nominal compensation counterpart (read: the economy’s aggregate wage bill). The back-to-back prints below the -2.5% mark are rare in postwar history (red bars), occurring just six other times prior to the pandemic.

Tellingly, two-quarter growth in nominal GDP and nominal compensation boasts a robust .89 correlation since 1947. Stronger (weaker) revenues naturally translate to stronger (weaker) pay. However, revenue is running well below compensation. The risk is high for cost-cutting in the second half of the year.

But Initial Jobless Claims are falling, not rising! Recall, we acknowledged the cresting of the second layoff wave one week ago. The latest figure validates our conclusion. As for the third wave building, a visit to DailyJobCuts.com is in order. On a per diem basis, the ups and downs of its Closings (yellow bars) precede those of Initial Claims (blue line). June’s top in Claims was foreshadowed by the March top in Closings. Since May’s low, Closings per day have risen anew, which points to a fresh acceleration in new claimants.

CEO turnover confirms the coming rise in virtual pink slips. Challenger, Gray & Christmas reported 200 CEO exits in August, raising C-Suite departures to 1,450, the highest year-to-date total on record (light blue bars). As Challenger explained: “Economic uncertainty tends to drive leadership decisions and several indicators suggest not only is the labor market softening, but the market overall may be heading for a downturn. Companies are cutting costs across the board…an ideal time for new leaders to ascend.” New CEOs always put their stamp on a company by streamlining operations and cleaning house. The new CEO will get the Hallmark kiss, paid in hard dollars. As for the workers getting the shaft, they’ll experience the opposite of a happy ending.

Forever associated with King Arthur and his Knights, the mere mention of the word “castle” conjures English moats, drawbridges, dragons, and, of course, damsels in distress. But did you know? Castles are more plentiful in Germany than the British Isles, according to the World Population Review. Among Europe’s most visited landmarks is Neuschwanstein Castle in Schwangau, Germany. In 1868, King Ludwig II of Bavaria commissioned this fairy-tale-like castle to be his personal retreat. Designed as an homage to Richard Wagner’s operas, it was fitting that Ludwig invited the composer to live in the castle after he’d gone broke (What is it with genius composers and destitution?) Gochsheim Castle is further down the list. An old royal residence in the Kraichtal area of Baden-Württemberg, it houses a museum and holds around 100 works of local artist Karl Hubbuch. Its most unique feature, though, can be found on its upper floor. There, if it’s your scene, you will find the world’s largest collection of irons, around 1,300 of them, to be exact, that were collected by Heinrich Sommer. To say then that Gochsheim Castle is a going “pressing” concern does indeed suit.

Chief Financial Officers’ (CFO) most pressing concerns were our first stop yesterday upon the release of the third-quarter CFO Survey. Jerome Powell & His Knights and The Merry Adventures of Monetary Policymaking topped the list followed by Demand/Sales/Revenue, Labor Quality/Availability, Health of the Economy, and Cost Pressure/Inflation. This order is based on total responses.

Filtering challenges by their deltas quarter-over-quarter sequentially yields a different scoring. At an increase of 5.2 points from this year’s second to third quarters, the Economy posted the largest increase (see large table); at 4.5 points, the Election came in second. Up 1.6 points, Revenue worries ranked third, followed by Access to Credit/Funding, which rose by 1.0 point, and the Financial Health of Customers, which was unchanged. Notably, the Federal Reserve (-1.0 point), Labor Quality (-2.4 points) and Inflation (-4.0 points), all in the survey authors’ Top 5, fell to the bottom five using our ‘flow,’ rather than their ‘stock’ parameters.

CFOs are increasingly nervous about recession and how it would impair their companies’ top-line growth. Election uncertainty could also impede growth. In a special question, the survey revealed “that 30% of respondents reported having ‘postponed,’ ‘scaled down,’ ‘delayed indefinitely,’ or ‘permanently canceled’ their investment plans because of the election, a bump up from the 28% voicing the same concern last quarter. Additionally, a larger share of firms took more than one action with respect to curtailing investment.” The interpretation: The obstacles to growing their businesses via investment have multiplied in the three-month interval between the second and third quarter surveys.

From a purely practical standpoint, the aggregate of these concerns should create an air pocket for business investment that manifests as weaker gross domestic product (GDP) growth into yearend at a minimum. The unequivocal message CFOs are conveying should prompt the macro community to mark down its third- and fourth-quarter GDP forecasts. And while the post-election period generally is a time the clouds clear and enable executives to see through to the business operating environment the next four years will bring, each candidate’s disparate stances on tax policy will prolong uncertainty into 2025’s first half. Separately, but of equal import, the degree of gridlock will also factor into the mindsets of players of all sizes throughout Corporate America.

As for what clarity CFOs can offer, their expectations for real revenue, a growth proxy, came in at 1.4% in the third quarter, close to the second quarter’s 1.3%, but below the first quarter’s 1.7% (purple bars). All three are “below trend” using the Congressional Budget Office’s (CBO) 2.0% potential GDP estimate (dashed red line). This year, CFO real revenue growth has nicely tracked GDP (green bars) and gross domestic income (GDI, orange bars). The takeaway is that today’s GDP report could be weighed down by more than the lower personal income ascribed to the 818,000 negative benchmark revision to nonfarm payrolls in the year ended March 31, 2024.

Curiously, CFOs reported contracting real revenues in 2023’s final three quarters, a period which saw refutations via reported expansions in GDI and GDP (red circled area). Because today’s revisions stretch five years back, to 2019, it’s likely that a good bit of post-pandemic economic history is rewritten.

Looking ahead, CFOs remain stubbornly cost conscious. Leveling the playing field between optimism about the economy (lilac line) and their own companies (aqua line), the latter has been painted more rosily in the post-reopening period. A better firm-specific outlook vis-à-vis the broader economy speaks to the control over costs that can be exerted to support earnings (light blue line).

The Survey breaks out CFOs’ growth outlook five ways: Revenue, Price, Wage Bill, Unit Cost and Employment. The average 2024 revenue expectation was 4.9%; it jumped to 7.1% for 2025 (see small table). Higher anticipated Price growth — to 4.0% from 3.5% — underpins expectations as Wages or Unit Costs were little changed. Defying the rosy forecast, however, are plans to slow Employment growth to 3.2% from 5.6%. In the dismal science, growing revenues amidst shrinking headcount growth means managers will squeeze more productivity out of each of their employees. While the survey data are averages, in the aggregate, they transmit the message that labor remains in the crosshairs, a pressing concern for any worker collecting a paycheck.

Itchy eyes. CHECK. Runny nose. CHECK. Sneezing. Scratchy throat. Clogged up. CHECK, CHECK, CHECK. It must be ragweed season! It’s estimated that one ragweed plant can produce up to one billion grains of pollen. If you live anywhere from the Midwest to the East Coast, you’ve seen the yellow dust congeal on everything from park benches to your smartphone screen. It’s this powder that causes reactions in about 15% of all Americans, making the ragweed pollen allergy one of the most common in the country. Thankfully, the season isn’t very long – it runs from late summer through mid-fall, once the plants’ flowers reach maturity. Most ragweed allergy sufferers experience the most severe symptoms around mid-September, so hopefully we’re past peak. Medication is the first line of defense against ragweed. Eye drops and nasal sprays treat specific problems, while over-the-counter antihistamines can minimize the symptoms.

Allergy relief was central to a QI brain trust exchange after yesterday’s Conference Board consumer confidence hit the wires. “SHORT DYSON! LONG ZYRTEC!” Consumer buying plans for vacuum cleaners and carpet crumbled — the former fell to 4.8% of September’s respondents from 8.6% in August, while the latter plumbed to 5.4% from 10.7%. Both monthly declines were extreme, scaling to z-scores of -2.3 and -2.4, respectively. To this Danielle quipped: “Old carpet that’s NOT vacuumed. What could go wrong? (God bless you!)”

These nuggets did not move markets, but the disappointment on the labor front was integral in bull-flattening the U.S. Treasury curve. Higher unemployment risks were front and center with the further rise in the Jobs Hard to Get index. September’s 18.3% figure marked the fourth straight monthly increase and August was revised high. Together, these moves pushed this excellent tracker of American joblessness to a fresh three-year high.

For perspective, Jobs Hard to Get holds a stellar .89 correlation with the official U.S. unemployment rate over-all cycles since the survey’s 1967 inception. Moreover, using a single-factor model, the current level is consistent with an unemployment rate of 4.8%, well north of the 4.2% reported for August and noticeably above the Fed’s 4.4% median year-end forecast. In turn, the probability for another aggressive 50-basis point rate cut at the Fed’s November meeting got a shot in the arm, pricing as high as 62% intraday, up from 54% on Monday and 52% on Friday.

Both sides of households’ assessments of current labor conditions yielded a continued convergence echoing the Beveridge Curve. The trade-off between job vacancies (i.e., Jobs Plentiful) and unemployment (i.e., Jobs Hard to Get) generates a smooth, downward-sloping curve over time (light blue scatter plot). At 12.6, the difference between the two is the lowest non-pandemic print since May 2017. While previous declines in labor demand did not translate to higher unemployment, we’ve recently seen that shift as Jobs Plentiful declines have been accompanied by a persistent rise in Jobs Hard to Get (inset chart). We reiterate that future gains in unemployment are in train.

Drilling down, Conference Board granular data revealed eight of the largest U.S. states are emitting distress signals on their job markets. Swing state Pennsylvania stood out. The sharp deterioration throughout the third quarter pushed its Present Situation well below its prior orderly path (purple line). Also released yesterday, the Philadelphia Federal Reserve’s non-manufacturing report saw current Full-Time Permanent Employees register a quarterly net contraction for only the third time in the survey’s 14-year history (orange line). Likely, there could be more. The leading New Orders-Inventories spread clocked a sixth straight negative quarter in the July to September interval, an unprecedented stretch (light green line).

Another swing state – Michigan – was equally troubling. Consumers residing in Auto Central flagged a sizable worsening in current conditions in the Wolverine State. Given they move in tandem, the third quarter’s sharp plunge (lilac line) warns of downside risk to U.S. auto sales (teal line). Automakers are doing their level best to prop sales, juicing incentives to more than $3,000 per vehicle in 2024’s third quarter, which is 60% above year-ago levels.

Not depicted, Florida’s Present Situation has also fallen out of bed. In the three months ended September, the -36.8-point contraction was the largest since the early months of the Great Recession. Lightcast’s mid-September Leisure & Hospitality Job Postings falling by a record 40% in the post-pandemic era is likely at play given the Sunshine State’s reliance on its tourism industry.

The neighboring Fed District to the north piled onto the regional labor dialogue. The Richmond Fed current Manufacturing Employment index plumbed to a recessionary -22 in September (red line). Not to be outdone, current Services Employment contracted throughout the summer quarter (blue line). Cyclical spillover risks are manifest along the Atlantic Coastline. Synchronous negativity in manufacturing and service employment that extends to three months, as was the case this month, is rare and domiciled in the 10th percentile.

Upstream supply-demand imbalances were also evident in future gauges of Richmond’s factory sector. A massive setback in expected New Orders — to 7 in September from 27 as recently as April (yellow line) — contrasts with rising inventory sentiment (read: bearish). At 12, Future Finished Goods Inventories relative to desired levels (green line) rose above future demand. The extraordinary inversion speaks to the risk of an inventory correction targeting Wholesaling and Transportation & Warehousing. If you’re allergic to these labor risks presented, join us in going long Zyrtec.