Evening Brief – 03.01.24
Recession or No Recession?
Current forecasts of a US recession for the first quarter of the year appear to be off track based on current GDP projections. While output is expected to slow in the first three months of 2024, it might not be sufficient to align with the warnings of some analysts predicting a new downturn.
Growth in the first quarter is expected to be in the 2% to 2.5% range. According to Bureau of Economic Analysis data, the estimated growth rate implies a significant decrease compared to the strong 3.3% advance reading in the fourth quarter of 2023, which in turn represents a notable reversal from the white-hot 4.9% increase in the third quarter.
Wednesday’s revised estimate for the first quarter was somewhat lower than the previous estimate, but there is still no sign that economic activity is slowing to the point where the growth is jeopardized.
Survey data for February painted a generally optimistic view of US economic growth. “The early PMI data for February indicate that the US economy continued to expand midway through the first quarter, pointing to annualized GDP growth in the region of 2%,” said Chris Williamson, chief business economist at S&P Global Market Intelligence. “Although service sector growth cooled slightly, manufacturing staged a welcome return to growth, with factory output growing at the fastest rate for 10 months.”
The National Association for Business Economics likewise found that the risk of a recession is minimal. A recent poll of the group’s members predicts that the U.S. will grow 2.2% in real terms this year, up from 1.3% in November.
For some economists, however, the risk has only been postponed rather than avoided. Uber-bear economist David Rosenberg, of Rosenberg Research, said, “Not everything is coming up smelling like roses, as the consensus narrative and Fed commentary would have you believe.” He cites several red flags that could bring trouble later in the year, including soft residential construction, industrial production and retail spending data.
A more meaningful economic slowdown, or worse, cannot be discounted, but the prospects remain favorable that the next NBER-defined recession will not begin in the first quarter.
“The big question is: what’s the chance of a nasty landing? So maybe growth tips a little below zero, does it go deeply negative?” Michael Schumacher, Wells Fargo’s head of macro strategy, told CNBC. “We at Wells Fargo think that chance is vanishingly low at this point.”
There’s no dearth of possibilities, including inflation creeping back up and another delay in the anticipated start of interest rate cuts. Given the strong uptrend in risk appetite (equities, credit), most investors still regard those events as low-probability concerns – for now.