Economic Outlook
US: Recession or Resilience?
Looking ahead, will the US economy head into recession? We discussed this and more at the recent UBS Global Macro Forum in June in Singapore.
The forward momentum in the US economy today suggests enough resilience to delay recession – at least until the end of 2023 or even into 2024.
This is according to two macro commentators speaking at the UBS Global Macro Forum in Singapore in early June: Bill Dudley, Member of the Board at UBS, and a Former President and CEO of the Federal Reserve Bank of New York; and Julia Coronado, President and Founder of MacroPolicy Perspectives.
Supporting their outlook, they told Arend Kapteyn, UBS Chief Economist and Global Head of Economics and Strategy, are factors such as the current low levels of unemployment, the improving inflation outlook (which pushes up real wages), and some spending resiliency, as pandemic savings are further drawn down.
Granted, there are risks from credit tightening in the wake of recent banking turmoil, but the share of stressed banking sector assets is small, said Dudley, and the regulatory response potentially slow to play out.
Riding the risk of recession
Riding the risk of recession
In Dudley’s view, a recession is at least six months away. The impact of recent monetary policy tightening is already fading in some sectors, he said, citing the bottoming out of home sales and housing starts, and even some signs of recovery.
This trend reflects the broader economy’s strength. “Household and business balance sheets are still in good shape, in part because of the large fiscal transfers made by the government during the pandemic,” explained Dudley.
He also believes inflation is still too high – especially for services – with labour markets too tight.
“The Fed has more to do,” added Dudley. “The strength of the economy is raising questions about whether monetary policy is sufficiently restrictive to do the job required.”
Even the recent US banking woes are unlikely to create a significant credit restraint within the US economy, according to Dudley. Those institutions in distress account for less than 5% of total banking assets, he explained, and added that the problems were due to interest rate risk and an asset liability mismatch, not credit issues.
Talking up the tailwinds
Talking up the tailwinds
Not everyone agrees. “We see evidence of significant credit tightening coming down the pipeline, and this is yet to feed into the economy,” Coronado told the audience.
Despite her concerns, however, Coronado believes a recession is at least a year away. This forecast is based on four key tailwinds that she outlined for the US economy:
- Productivity – better supply chain functionality and softer labour markets with lower turnover are promising signs for businesses. These can offset the likely moderation in top-line growth and the compression in corporate profits. At the same time, already-large investments in business transformation and automation will start to filter through.
- Fiscal policy – state and local governments, which account for two-thirds of all government spending in the US, are in good financial shape from various policy initiatives to stimulate the domestic economy.
- Labour hoarding – a new dynamic where companies are learning from past mistakes so are more reluctant to lay-off workers. In turn, this is fuelling many dimensions of cooling, such as on hours worked and moderating wage growth – but which aren’t reflected in unemployment rates.
- Declining inflation – supply side improvements will lead to a cooling that will help offset moderating labour markets and wage growth. This will leave consumers with more purchasing power.
Fear of the unknown
Fear of the unknown
However, both Dudley and Coronado agreed that if unemployment does start to increase, it will be difficult to prevent a recession. Dudley pointed to the “Sahm rule” – in the 12 times since World War II when the unemployment rate has risen by more than half a percentage point, there has been recession every time.
Dudley doubts it will be a soft landing when the time comes. Coronado agrees, and is far from complacent that it might be short and shallow. “Recessions are negative feedback loops and take on a life of their own,” she explained.
This aligns with her view that the resilience of the US economy to date suggests that a large and unexpected shock might well be the catalyst for recession – the magnitude of another big banking crisis, a hard landing in China or a military conflict.
Such an event, which would be an unforeseen shock, could therefore have unforeseen consequences, she added.
Our inaugural Global Macro Forum in Singapore brought together institutional investors, corporate leaders and policy makers to discuss the macroeconomic outlook and trends impacting the region.
