Evening Brief – 01.09.24
Bulls Vs. Bears
The consensus estimate for GDP growth in the fourth quarter of 2023, according to 34 forecasters surveyed in November by the Federal Reserve Bank of Philadelphia, is 1.3% on a seasonally adjusted annual basis. This is a significant decrease from the explosive, but unsustainable growth seen in the third quarter. However, the current assessment strongly suggests that the U.S. finished last year with healthy, although ebbing momentum.
The concern is whether the predicted fourth-quarter downturn indicates that the economy is losing pace, which will continue in 2024 and jeopardize the expansion. The opposing opinion is that economic momentum is resuming at a sustainable rate following unprecedented volatility caused by the pandemic’s residual impacts.
“Some New Year cheer is provided by the PMI [survey data] signaling an acceleration of growth in the vast services economy, which reported its largest rise in output for five months in December,” said Chris Williamson, chief business economist at S&P Global Market Intelligence. “The improvement overshadows a downturn recorded in manufacturing to indicate that the overall pace of US economic growth likely accelerated slightly at the end of the year.”
One cause for guarded optimism can be seen in the Dallas Fed’s Weekly Economic Index. Through the end of December, the index, a multi-factor measure of US economic activity, surged to its highest level in over a year. Based on this indicator of economic activity, the U.S. macro trend is increasing, implying that growth will accelerate in early 2024.
Consumer spending and a strong labor market are two significant data points that persuade some economists that the U.S. can continue to expand. “We anticipate a Goldilocks economy – one that provides full employment, economic stability, and moderate inflation,” Commonwealth Financial Network recently told clients.
Nonetheless, those with a bearish view on the economy continue to warn that a recession is probable at some point this year. Although the economy proved more resilient than many forecasts anticipated in 2023, others say a slump has simply been postponed.
The president of Rosenberg Research, David Rosenberg, criticized many experts who reject concerns about the economy, noting parallels to mistakes that preceded the dot-com and housing crises in a recent memo to clients.
A key recession indicator highlighted by Rosenberg is the inverted yield curve. The 2s / 10s curve has been inverted for 13 months, the longest period since 1979 to 1980, and by as much as 157 basis points. Rosenberg asked: “Why would anyone bet against a metric that has gone 8 for 8?”, referring to its perfect record of predicting recessions.
Maybe so, but one thing is certain: the probability of a recession is currently minimal and will most likely remain so in the near future. Predicting what happens beyond a two-to-three-month horizon is, as usual, difficult.