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Recession Chances Declining?


Last month we said that much of the economic data we’re seeing is pointing to the elusive “soft landing” scenario. That’s where the economy slows but businesses and households spend sufficiently to sidestep a fully developed recession. As we close out the Second Quarter 2023, it appears the equity markets are giving more weight to our view, and less to the threats of tighter monetary policy from Fed Chair Jerome Powell.


Those are the words of Moody’s Analytics’ chief economist Mark Zandi, someone we’ve quoted in the past. Zandi, sees all the commentary and “base case” predictions indicating the likelihood of a recession, either this year or in 2024. In a recent story on Fortune.com, Zandi gave five reasons why 2023 is unique and why he believes we will avoid recession in 2023. All of this supports an argument we’ve been making that the still-healthy buying power of the consumer will prevent a severe economic downturn.


1) Approximately 25% of the “excess savings” from the pandemic remains.


2) Employers are “hoarding” labor because it is so hard to find.


3) Consumers and businesses have light debt as a percentage of disposable income.


4) Consumer inflation expectations have improved.


5) Oil process have not remined high after the Ukraine war-related blip in 2022.


More recently, the research from Asset Strategy mentions additional data that support the soft-landing narrative. In the Durable Goods report they look closely at two things: core capital goods orders and shipments. These readings both hit all-time highs for the latest (May) period. Consumer Confidence (June) hit its highest level since January 2022. And New Home Sales (May) were up 20% year-over-year. New homes have a greater effect on the economy than existing home sales.


Last Wednesday Fed Chair Powell told a group of central bankers in Portugal that he expects multiple rate hikes ahead. “We believe more restriction is coming.” What’s really driving it is a very strong labor market.” We think the talk is purposely tough. Powell is hoping the threat of more “restriction” will keep consumers, businesses, and the market in check. It looks like we are in for a 25- basis point hike in July, but then there are almost two months until the September meeting. If the inflation data stays on its current track, there may be no need for additional hikes.


Despite the tough talk, we have a less hawkish Fed and a resilient US economy.This combination creates positive conditions for US stocks and bonds to preserve or add to 2023 gains.

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