Author: Veronica Fulton, Research Analyst
Overall, the U.S. economy has proven resilient in the face of significant monetary tightening. Consumer demand has held up fairly well tied to a drawdown in pent-up savings. Growth in real wages and a contraction in energy prices have also provided a boost to disposable income. We’ve seen an increase in labor force participation while the unemployment rate remains historically low. Additionally, initial jobless claims have risen for the 3rd consecutive week while continuing claims have declined, indicating that those who are getting laid off are able to find new jobs relatively quickly. The Atlanta FED GDPNow is tracking 2.2% growth in GDP for the second quarter of 2023. At the margin, the consumer is healthy, the labor market is tight, and we’ve yet to see a significant contraction in economic activity. An imminent recession is just not supported by the data we’re seeing. The bull case, which assumes a “soft landing”, by our work, remains a reasonable, though not assured, possibility.
The bears’ main argument is that continued strength in both demand and labor markets will lead to pesky and persistent inflation. This could prove to be true, as inflation has eased primarily in goods. But the Fed’s key indicator, the Bureau of Economic Analysis’s Core Personal Consumption Expenditures (PCE) Price Index shows core inflation for April at 4.7% which continues to be well above the Federal Reserve’s 2% long-term target Achieving sustained disinflation may necessitate a loosening of labor market conditions and an extended period of tight monetary policy. This could ultimately put more strain on both the consumer and the financial system, causing a contraction in economic activity. While this is plausible, getting the timing right has proven difficult for the bears so far. Coming into 2023, the prevailing narrative was predicated upon a recession in the first half of the year coinciding with weak equity markets. At present, the economy has not fallen into recession and the S&P 500 is up 13.87% – talk about getting it wrong.
Anticipating a recession has left many investors offside. The S&P 500 has rallied 20% from its October low driven by strength in the most cyclical areas of the market while defensive sectors have underperformed. Timing the recession in the midst of a bullish tape is beginning to feel more trivial than not. In December, we put out a Spotlight “You Can’t Have a Recession Without the Consumer” which highlighted the seemingly underappreciated strength of the consumer that could buoy the economy for much longer than anticipated. This appears to be playing out, as recession projections have now been pushed out to the second half of 2023. Only time will tell whether that comes to fruition, but as the spot economy continues to hold up, the “recession-can” just gets kicked further down the road.
Source: VettaFi, NASDAQ Dorsey Wright, Federal Reserve Bank of Atlanta, New York Times, FactSet
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