By Howard Schneider
WASHINGTON (Reuters) – Dana Peterson, chief economist of the Conference Board, sees the sharp drop in the US group’s Leading Economic Index as a clear implication: if the United States isn’t already in recession, it will be soon.
Tell that to Matt Malone, Groundworks’ chief executive officer, and the response is far from recessionary — with his housing foundation and water management company still posting strong sales, several hundred vacancies to fill, and consumers willing to spend .
“We’ve been talking about an impending recession for several quarters now,” said Malone, whose Virginia Beach-based company has a national presence. “There’s a lot of confusion and mixed signals about what’s going on with consumers… Ultimately, we haven’t seen any impact on our business.”
This is the secret of the US economy, and increasingly the global economy, three years after the onset of a devastating pandemic, a year and a half after a still evolving inflationary spurt and many months after forecasts of recessions that have continued to miss the mark.
The major central banks have been raising interest rates at a pace that many politicians and economists thought would prove crushing and perhaps tame inflation, but at a hefty cost. Inflation has slowed somewhat, but not so fast or so far that any central banker feels the war has been won, and recent data has shown that progress is slowing.
Demand for goods and services has fallen in sectors like housing and technology, both of which are very interest rate sensitive and have been big winners from the pandemic, perhaps expecting a cut; But macroeconomically, many of the recent surprises have been on the upside as consumers find more ways to spend.
Job market?
Companies like Malone’s don’t seem to have gotten the memo. The U.S. unemployment rate is 3.4%, its lowest since 1969. At this point, Fed officials are less concerned about a recession than they are about trends like labor hoarding, which could keep available labor tight and prevent the modest rise in unemployment from theirs Believed to be necessary for inflation to fall.
Cleveland Fed President Loretta Mester said in a CNBC interview on Friday that she thinks the economy will grow “well below trend” this year, but will still grow.
While some sectors are slowing, “there’s been a little more underlying strength this year than forecasters thought,” Mester said, while companies “have been putting so much effort into hiring that they’re going to do whatever it takes to get people to.” are holding staff, so after we get past this slowdown, they’ll have the staff they need.”
Chart 1: Leading indicators signal recession, https://www.reuters.com/graphics/USA-ECONOMY/RECESSIONTEMPLATE/jnvwyaxervw/chart.png
CONSUMER IS “KEY”
Similar dynamics have been developing globally, as seemingly inevitable recessions in the Eurozone and the UK have given way to modest sustained growth.
Unusually warm weather and lower energy prices have contributed. Also stronger-than-expected consumer spending and, for the world outlook, the reopening of the Chinese economy after strict COVID lockdowns.
It is, admitted Peterson, an odd situation. Even if there is a recession in the US, it could well be brief and superficial as companies retain hard-to-find workers and make only modest cuts in household and business spending.
“Companies tell us they’re continuing to hire or aren’t trying to downsize their workforce,” Peterson said. However, she added that ultimately “the consumer is key.”
“How much are consumers willing to spend? From their own income, their wealth… their credit cards? Maybe we’re getting closer to the point where consumers are being tapped.”
There are warnings on this front beyond the Conference Board’s main US index, which has issued a recession warning for about a year.
In the bond market, yields on shorter-dated government bonds are higher than those on longer-dated securities, a classic recession signal but one that Fed officials discount as being distorted by inflation.
On a recent earnings call, Walmart Inc executives noted strong sales growth but signs of economically weakened households: Higher-income consumers, for example, are shopping cheaper to beat inflation or delaying purchases of durable goods.
“MORE DURABLE”
However, if consumers continue to consume, hiring managers continue to hire and the economy continues to expand, the dilemma for the Fed and other major central banks is whether inflation can slow down in such an environment.
It’s a questionable suggestion. In fact, an Atlanta Fed model currently sees US GDP growth in the first quarter at a robust 2.5%.
Since the US Federal Reserve began changing monetary policy stance in late 2021 and began raising interest rates last March, the situation has brought financial markets into their closest alignment with the Fed’s outlook.
Markets have long been skeptical of the Fed’s resolve, but what finally appears to have synchronized it with the Federal Reserve was data showing the economy was not collapsing easily and inflation was not falling easily. That threw the idea that the Fed would “pivot” on a penny to lower interest rates coldly into the water.
Benson Durham, head of global asset allocation at Piper Sandler, said his analysis suggests that the recent rise in bond yields that markets are aligning more closely with the Fed may not be such good news as it appears to be being driven by expectations of higher inflation had been.
“Treasury yields have risen,” Durham wrote since the last Fed meeting. “But to conclude that financial conditions are tighter as a result and that the Fed now has less work to do would be premature… The Fed may be hitting harder now.”
The release of February employment and inflation data in the coming weeks will be important to determine if that will happen as Fed policymakers prepare for a March 21-22 meeting that will take a decision on interest rates and will include updated forecasts for policy rates and economic prospects.
US consumption and inflation data released on Friday seem to support Fed policymakers to raise their estimated interest rate breakpoint above the December forecast of 5.1%. Consumer spending rose at its fastest pace in almost two years in January; Inflation tracking indexes, which form the basis for Fed policy, accelerated this month; and revisions to the figures from late 2022 showed less progress than previously thought in fighting inflation.
However, some argue that the evolving market outlook for more stubborn inflation and higher interest rates may just be the downside of an economy that never ceases to surprise with its strength and that Fed policymakers still believe they can lower without collapsing levels of inflation.
“Markets have overpriced a recession in the second half of 2022 and a recession in the first half of 2023,” St. Louis Fed President James Bullard told CNBC last week. “It appears the US economy may be more resilient than markets thought six or eight weeks ago.”
(Reporting by Howard Schneider; Additional reporting by William Schomberg in London; Editing by Dan Burns and Paul Simao)
