Signs of Stabilization or Rise of the US Economy
The restart of China and its economy, the deceleration of gas prices in Europe and inflation in the US, as well as the good state of the US labor market tend to remove the risk of a global recession. As pointed out by a related New York Times article with the suggestive title “Which Recession?”, the US Federal Reserve Bank, the Fed, aggressively raised interest rates, but instead of the recession we expected it to cause, the economy seems to be doing very well. . US businesses added half a million new jobs in January alone, the housing market is showing signs of stabilizing or even rising, and many Wall Street economists are beginning to downplay the possibility of a recession this year. And U.S. unemployment is at 3.4%, the lowest it has been in at least 53 years, while hiring over the past year has been so plentiful that it worried Fed Chairman Jerome Powell.
Bond markets continue to point to an imminent recession, with short-term US and German debt yields moving higher.
As the American newspaper points out, not all the evidence is rosy. The manufacturing sector remains weak and consumer spending appears volatile, thus justifying some economists and analysts still predicting a recession. However, their tones are much lower. Citi Group, for example, gives a 30% chance of a global recession, but is clearly more optimistic compared to last year when it gave a 50% chance. Reuters points out at the same time that many of the world's largest companies, mainly US technology giants such as Meta, IBM, Amazon, Yahoo and many others, are making thousands of layoffs. However, as Ronnie Walker, an economist at Goldman Sachs, points out, these layoffs mainly concern the technological giants that during the pandemic had hired unusually high numbers of employees. He also underlines that the technological giants do not represent the wider economy.
At the same time, bond markets are still trending towards an impending recession. Yields on short-term debt in both the US and Germany, as well as some other economies, are moving upward, often exceeding long-term debt yields. And this historically is an indication that the market is discounting an upcoming recession. In the meantime, bond traders expect the Fed to raise interest rates to between 5% and 5.25% and then decide on a rate cut towards the end of the year. From early last year until just a few days ago, the Fed raised interest rates on the dollar from near-zero levels to 4.5%, recording the most aggressive turn to restrictive monetary policy in decades. This increase in borrowing costs has automatically translated into higher car and mortgage payments, and for the time being it has indeed appeared to be slowing the US economy. However, since December, when it appeared that it intended to proceed at a softer pace in the restrictive policy, the markets relaxed again. Already, mortgage rates in the US have eased slightly. Home loan applications are recovering, albeit at low levels. New home sales are about the same as they were before the pandemic. Used car sales had been down, but are now trending back up. And while retail sales and spending by American households have declined, many analysts estimate that new forces are entering the market capable of boosting consumer demand this year.
In short, after more than a year of high inflation that eroded consumer purchasing power, wage increases are starting to outpace price increases. And since businesses are still hiring, Americans have money and are sure to spend it. There is, of course, no guarantee that all these factors will balance out the impact of interest rate hikes. The lower income strata have already spent their savings much faster than the higher income social classes and no longer have the room to spend more. Speaking to the NYT, Nella Richardson, an economist at the data firm ADP, disagrees with the impression that the US economy is accelerating again and recalls that “it is perfectly possible for an economy to have a strong labor market and low growth rates.” For the Fed, however, the critical question is how much it needs to raise interest rates to ensure that both inflation and the economy and its growth return to a sustainable level.
source: REUTERS, THE NEW YORK TIMES/THE CYPRUS DAILY