The “R” word continues to haunt our Global Economy.
Europe is facing recession in 2023 as energy costs, and indeed energy availability, are threatened by the war in Ukraine. Rishi Sunak is facing a deep recession as a £40 billion gap in the UK balance sheet needs closing. Xi Jinping’s renewed commitment this week to a zero covid policy means Chinese economic growth totally compromised.
And in the giant US economy, despite a better third quarter number, talk of a 2023 recession abounds. According to nearly 65% of US economists, as polled by the Wall Street Journal, the US economy is on the verge of recession..
Or is it?
Typical narrative in the US involves a very aggressive Central Bank which will continue to raise rates, engineer a dramatic economic slowdown, and in its own words bring the economy “more pain”.
Is it widely forecast? Yes
Is it inevitable? No.
One of the risks in economic forecasting is that the data we rely on is out of date.
GNP itself is a lagging indicator by the time we get it, and subject to a lot of revision. Labour market statistics are notoriously lagging.
However there is a way around this.
Recently, many economists have started looking at more short term ‘real-time’ data. Such data might include restaurant bookings, electricity usage, rail traffic data or Google mentions. It may not have the same quality as government sourced GDP data but neither does it have the unwelcome time-lag. This became especially useful during Covid as this so called ‘higher frequency’ data informed the debate over when best to re-open economies.
Policy makers who pay heed to high frequency may have an edge in judging the real underlying strength of an economy.
The US economy is slowing – that’s not the question.
In 2021, it grew close to 6%. The OECD have it at 1.5% this year and 0.5% next year 2023.
But what does higher frequency data tell us? The Atlanta Fed produce a survey of where they see the economy in the past week. It is based upon about thirteen different factors. This measure actually picked up in October and is suggesting a substantially more positive direction than blue chip economists are. Another new short term indicator – the OECD weekly tracker of economic activity through October – is also holding up better than conventional forecasts.
The consumer holds the key to the US economy, accounting for close to 70% of all activity and while we are seeing record inflation which impacts on disposable incomes, recessionary cutbacks don’t appear imminent. October’s retail sales data was basically flat on the month and up close to 8% on the year. If we move away from the official data, we still get a picture of resilience. Based on the OpenTable reservation service, which manages booking at restaurants, people are back eating out at pre-pandemic levels. People are also confident enough to spend money on travel. The numbers flying and traveling generally are also holding up based on TSA data.
Can we drill into the jobs market to look at more unconventional measures to gain perspective? Looking at job site postings, demand may be slowing somewhat but still remains very strong by historic records. Some analysts have also been looking at Google data which shows that searches for items such as “unemployment benefits” are at lows in the US. Bottom line is there is little sign of stress in the jobs market.
Some captains of industry, such as Amazon’s Jeff Bezos, are warning of a severe recession in the next six months, while Jamie Dimon of JP Morgan sees a downturn that will spark panic in credit markets and lead to a stock bear market. It is worth noting that Dimon has been of this view for some time.
So can the US economy sidestep this recession risk despite the odds? Brian Deese, President Biden’s top economic advisor, believes that the US has the strength and resistance to shield it from recession. A strong jobs market and a sold household balance sheet are key in his view.
Even if a recession is not avoided, much of the higher frequency data suggest it may be shallower than many expect.
Tradewinds 