The yield curve is no longer inverted, and the recession probability is declining, see charts below.
To understand if a recession is coming, it is a better idea to look at the incoming data than to look at the yield curve because long rates are not only a reflection of the business cycle but also foreign demand, fiscal policy, and the term premium. And the incoming data continues to look just fine, see also here.
Our latest US housing outlook is available here, and we remain constructive.
Why?
Because we only get a recession when the economy experiences a big shock such as Covid, Lehman, the IT bubble bursting, and the commercial real estate crisis in the early 1990s.
Today is not such a shock.
Today, we are experiencing a gradual slowdown engineered by the Fed. The Fed raised interest rates to slow down the economy to slow down inflation.
Inflation has now come down, and the Fed can begin to focus on other parts of the economy, particularly the labor market but also the housing market. If the Fed doesn’t like what they see, they will lower interest rates faster.
The bottom line is that the ongoing soft landing in the economy also implies a soft landing in the housing market.
According to data from the International Energy Agency, 90% of homes in the US have air conditioning, but only 10% of homes in Europe and 5% of homes in India, see chart below. For China, the number is 60%.
The unemployment rate is calculated based on the Current Population Survey, and the response rate for the Current Population Survey was 90% in 2012, and now it is around 70%.
Similarly, the response rate has declined across other important economic indicators, see chart below, and there is a new group of “survey professionals” that make multiple entries into the same survey, which may play a role in private surveys, see also here.
The bottom line is that the incoming data is more unreliable and creates extra uncertainty for investors and policymakers.
Looking at the incoming data, the facts are the following:
1. The unemployment rate declined in August, and looking at the establishment survey and the household survey, it is difficult to see strong signs of a slowdown in job creation, see chart 1.
2. Wage growth accelerated to 3.8% in August and wage growth remains sticky well above pre-pandemic levels, see chart 2.
3. Daily data for debit card transactions shows that consumer spending has been accelerating in recent weeks, driven by spending on clothing, food services and drinking places, sporting goods, and motor vehicle and parts dealers, see the following five charts.
4. Weekly data for retail sales went up last week and remains solid, see chart 8.
5. Jobless claims have declined for several weeks, see chart 9.
6. Continuing claims have declined for several weeks, see chart 10.
7. Default rates and weekly bankruptcy filings are trending down, see chart 11.
8. The Fed’s weekly GDP model suggests GDP is 2.4% and the Atlanta Fed GDP Now says GDP this quarter will be 2.1%, see charts 12 and 13.
9. Weekly data for S&P 500 forward profit margins shows that profit margins are near all-time high levels, see chart 14.
10. The stock price of staffing firms is rebounding, which suggests that we could get a rebound in job openings, see chart 15.
The bottom line is that the US economy is not in a recession, and there are no signs of a recession on the horizon. Our chart book with daily and weekly data is available here.
There are more solar and wind power projects under construction in China than in all other countries combined, see chart below.
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Key Takeaways
[1] Source: FY 2023 Evercore Secondary Market Survey Results
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In Canada, demand for foreign labor doubled starting in 2022, see chart below.
If AI is having such a profound impact on call centers, telemarketing, and other business process outsourcing jobs, then unemployment in the Philippines and India should be moving higher. But that is not what the data is showing, see chart below.
The latest data from the Treasury shows that the US government now pays out on average $3 billion in interest expenses per day, including weekends, see chart below.
If the Fed cuts interest rates by 1%-point and the entire yield curve declines by 1%-point, then daily interest expenses will decline from $3 billion per day to $2.5 billion per day.
