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This article is reproduced from:CITIC SecuritiesResearch

US data such as PMI and non-farm payrolls have weakened one after another, market trading has declined, from "resilience" to "flash crash", what went wrong?

(1) Trend concerns:The employment gap has been filled, and the previous greatest support for employment and the economy may have disappeared. The risk of non-linear increase in unemployment rate under high interest rates has increased significantly.

(2) One of the short-term interferences:In an election year, economic activities will also be affected to a certain extent. The manufacturing PMI tends to decline seasonally before and after the election. The unexpected decline in PMI and employment this month may also be contributed by the uncertainty of the election.

(3) Short-term interference 2:Due to the hurricane weather, the number of people temporarily unemployed and absent from work due to weather reasons increased significantly in the non-farm data, indicating that the hurricane still had an impact on this month's data.

Overall, short-term disturbances such as the election and weather do exist, but the general trend of weakening employment may have already formed, and consumption and production will also be affected; the current inflation risk has been basically eliminated, and there is still a possibility that the Fed will cut interest rates beyond expectations in the coming year.

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U.S. economic data such as manufacturing PMI, non-farm payrolls, and retail sales have weakened recently, and the market has entered a recession trading mode. From the second quarter GDP exceeding expectations to the "flash crash", what went wrong?

In the second quarter, the US GDP grew by 2.8% year-on-year, significantly higher than the previous value of 1.4%. Consumption and fixed investment drove a 2.2% year-on-year growth, and the economy did not seem to have much risk. However, many data since July have weakened significantly: the ISM manufacturing index was 46.8, falling for four consecutive months and hitting an eight-month low; non-farm payrolls increased by only 110,000, and the unemployment rate rose to 4.3%, triggering the Sam recession rule; retail sales growth unexpectedly dropped to around 0%, just one step away from negative growth. Affected by this, recession concerns have greatly overshadowed the positive effects of interest rate cuts, US stocks and commodities have fallen sharply, and US bond yields have broken down.

How should we understand the recent data changes? We provide some perspectives, including trend concerns and short-term interference:

(1) Trend concerns: The employment gap has been filled, and the previous greatest support for employment and the economy may have reversed. If high interest rates are maintained, the risk of a subsequent nonlinear increase in unemployment will increase significantly.

Although recent economic data is weak, it is still not the worst compared with the lows at the end of 2022 and the beginning of 2023. However, we believe that the current recession risk faced by the US economy is much higher than before. The reason is that the core logic that has supported the employment market in the past two years, the insufficient labor supply, is undergoing a trend reversal. After the epidemic, due to a large number of retirements and deaths, the US labor gap once reached several million. Although the Fed quickly raised interest rates after 2022, investment, consumption and other indicators have fallen sharply to previous recession levels, but the job market is very resilient. In the context of lack of people, companies dare not rashly lay off employees, and the unemployment rate has always remained low. This is the fundamental reason for the US economy to avoid recession. However, since the second quarter of this year, the situation has reversed. The employment gap has fallen sharply compared with 2019 and is close to being filled. The supply contradiction no longer exists, demand pressure begins to appear, and the unemployment rate rises rapidly. In the short term, since the improvement of supply is a trend change, the pressure can only be relieved by stabilizing demand, and interest rate cuts may need to be faster.

(2) One short-term disturbance: In an election year, not only will the U.S. stock market be more volatile, but economic activities will also be affected to a certain extent. The manufacturing PMI tends to decline seasonally before and after the election. This month's PMI and employment figures fell more than expected, which may also be due to the uncertainty of the election.

The market is familiar with the phenomenon that US stocks fluctuate and rise when the election approaches, but it is easy to overlook that economic activities can actually be affected by the election. We have counted the trend patterns of the manufacturing PMI in election years and non-election years, and found that in the second half of the election year, the manufacturing boom will systematically decline, and the employment sub-item is the hardest hit area. The reason may be that the uncertainty of the election policy has led to a decline in corporate investment and production willingness. The recent unexpected decline in PMI and employment data may also be affected by the early impact of this year's election.

(3) The second short-term interference: the impact of hurricane weather. The number of people temporarily unemployed and absent from work due to weather reasons in the non-agricultural data increased significantly, indicating that the hurricane may have caused interference to this month's data.

In this month's non-agricultural survey report, the U.S. Bureau of Labor explained that Hurricane Beryl may not have much impact on the data changes, but from the actual data structure, we can still find some clues of short-term impacts caused by extreme weather. For example, the number of temporary unemployed people this month has increased by nearly 250,000, which almost explains 80% of the new unemployment. This ratio has been an extreme case in the past two years, and the changes in temporary unemployment have always fluctuated greatly. In addition, the number of people who were unable to work due to weather reasons was also significantly higher than the seasonal level, indicating that there are indeed some abnormal factors in the working environment this month, which is likely to be caused by the hurricane. Therefore, this month's non-agricultural may still be slowing down marginally, but the actual degree of deterioration may be far less exaggerated than the data shows.

In general, although factors such as the election and weather have had a significant impact on short-term data trends, the general trend of employment slowing down after the decline in supply support has been determined, and consumption, production, etc. may also be affected; after the inflation risk has been basically eliminated, the Fed has ample room for operation and the urgency of stabilizing demand has increased. Although the market has already priced in a 50bp rate cut in September, we still suggest the possibility of a faster-than-expected rate cut in the coming year.

risk warning

The US inflation and economic growth exceeded expectations, leading to the continued tightening of the Federal Reserve's monetary policy, a sharp appreciation of the US dollar, an increase in US bond interest rates, a continued decline in US stocks, a commercial bank bankruptcy crisis, and a currency and debt crisis in emerging markets. The US economic recession exceeded expectations, leading to a liquidity crisis in the financial market, and the Fed was forced to turn to easing. The European energy crisis exceeded expectations, the eurozone economy fell into a deep recession, the global market fell into turmoil, external demand shrank, and policies faced a dilemma. Global geopolitical risks have intensified, Sino-US relations have deteriorated beyond expectations, uncontrollable factors have emerged in commodities and transportation, the degree of anti-globalization has further deepened, supply chains have continued to be disrupted, and competition for related resources has worsened.