Dan Habib on Late-Cycle Signals: Growth Slows, Policy Pressure Builds

By Matt Brienen

Published: 2026-02-10T20:45:54+00:00

The macro picture is beginning to resolve into something more fragile than the “resilient economy” narrative that dominated much of last year. A growing body of data now points to slowing growth, fading labor momentum, and easing inflation pressures, all of which are reshaping market expectations for monetary policy. These developments are not isolated prints but a cluster of signals that together suggest the economy is late-cycle and losing speed.

---

### Labor and the Consumer: The First Cracks

The labor market, once the backbone of economic strength, is no longer providing the same support. Recent private payroll data showed only marginal job creation, while alternative datasets pointed to net job losses. Job openings have fallen sharply, reinforcing the idea that demand for workers is weakening across the economy. Claims data have also ticked higher, and when accounting for long-duration unemployment beyond benefit expiration, underlying slack appears more significant than headline unemployment rates imply.

That softness in labor is now feeding into consumption. December retail sales came in flat despite expectations for a strong holiday season. More importantly for the macro outlook, core retail sales, the portion that feeds directly into GDP, declined when markets were positioned for a meaningful increase. With prior months revised lower, the shortfall in consumer activity was larger than it first appeared. For an economy still heavily dependent on consumer spending, this marks an important inflection point rather than a statistical anomaly.

---

### Inflation, Rates, and the Policy Crossroads

While growth signals are weakening, inflation dynamics continue to improve. Wage growth, a key driver of persistent inflation, has decelerated further, suggesting labor-driven price pressures are cooling. Broader inflation measures remain elevated on paper, but housing components continue to overstate actual price trends due to lagged methodologies. Real-time data show shelter costs rising far more slowly, implying underlying inflation is better behaved than official readings suggest.

Bond markets have responded to this shift, with yields moving lower as investors reassess the growth and inflation outlook. Falling yields reflect increasing confidence that policy is restrictive relative to current conditions, and that the Federal Reserve may need to ease sooner than previously expected. The central bank now faces a familiar dilemma: inflation has not fully returned to target, but forward-looking growth data are deteriorating. Arguments centered on rising productivity, particularly from technological adoption, are strengthening the case for cuts without reigniting inflation.

The bottom line is that the macro environment is transitioning from resilience to vulnerability. Labor is cooling, consumer spending is slowing, and inflation pressures are easing enough to give policymakers flexibility. Markets are positioning for a policy response, but the difference between a soft landing and a deeper slowdown will hinge on how decisively the Fed reacts to the weakening data now coming into view.