The much-anticipated recession of 2023 has not yet materialized. Some of the latest economic data is pointing to strength rather than weakness.
A strategist has a term for what that says about the state of the US economy.
“We call this a rolling recession,” David Bailin, chief investment officer at Citi Global Wealth Investments, told Yahoo Finance.
He explained that some sectors of the economy are already in decline, while others – like travel and leisure – are still going strong.
“Commercial real estate is clearly in a recession,” he said. “Some of our manufacturing and consumer staples industries are in recession right now.”
Commercial real estate has been hit hard by the shift to hybrid and remote work. Portal/Karen Ducey
“These are declining companies in the United States … but the overall economy is not,” he explained.
In fact, the latest S&P Global US Manufacturing PMI Index came in at 46.3 on Friday versus 48.5 expected. Anything below the 50 level is a contraction. Nevertheless, the survey data as a whole point to a continued expansion of the economy.
“Interest affects everything”
The Federal Reserve’s task of cooling the economy by raising interest rates rapidly to curb inflation was no easy task. Economists say the longer interest rates stay at these levels, the more likely it is that other sectors will be affected.
“Ultimately, tariffs affect everything,” Bailin said. “Small and medium-sized companies that need capital are now at a disadvantage. This will ultimately limit their growth or cause them to lay off employees or go out of business.”
Although the labor market is slowing, new jobs continue to be created. 399,000 jobs were added in May, beating Wall Street’s estimate of 195,000. Unemployment in the US is 3.7%.
“I think the job market shock is yet to come,” Liz Ann Sonders, chief investment strategist at Charles Schwab, told Yahoo Finance earlier this month.
“I think over the next month or two, what companies are saying about their cost structure, particularly labor costs, will be a big clue as to whether this might be the proverbial next shoe to drop,” she added.
The story goes on
Until there are major ruptures, some strategists are cautious and do not speak of a recession in the near term.
“We have lowered our estimate of the likelihood of the US economy entering a recession over the next 12 months to 25% (from 35% previously),” Goldman Sachs economists noted earlier this week.
Jay Hatfield, CEO of Infrastructure Capital Management, points to the residential real estate sector as an indicator that it’s too early to forecast a recession.
“We don’t think we’re going to be in a short-term recession in the US as the US housing sector is resilient due to the lack of homes for sale,” Hatfield said.
Another sign of strength is consumer spending. Non-inflation-adjusted retail sales in May rose 0.3% month-on-month while a 0.2% decline was forecast.
“Contrary to expectations, May retail sales headlines show that consumer spending remains resilient,” Oren Klachkin, senior US economist at Oxford Economics, wrote in a recent note.
Federal Reserve Chairman Jerome Powell leaves a news conference following the release of the Fed’s policy decision to leave interest rates unchanged at the Federal Reserve in Washington, U.S., June 14, 2023. Portal/Kevin Lamarque
He added: “The recession will be delayed as long as consumers continue to spend.”
Currently, the Federal Reserve is playing a balancing act. The central bank has suspended interest rate hikes but warned that another hike or two could come later this year to continue the fight against inflation.
On Thursday, Fed Chair Jerome Powell reiterated to lawmakers that the central bank expects to hike rates again, but at a slower pace to avoid the economy slipping into recession.
Ines Ferre is Senior Economic Reporter at Yahoo Finance. You can follow her on Twitter @ines_ferre
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