The economic outlook in the United States is currently a subject of much debate and uncertaintyVarious indicators can point in different directions, leaving analysts to grapple with contrasting narratives about a potential recession or a soft landing of the economy.
When taking a closer look at the dynamics shaping the U.Seconomy today, the perspective one adopts can lead to starkly different interpretationsOn one hand, business confidence metrics suggest an approaching economic downturn, while consumer sentiment data appears significantly more optimisticHow can we reconcile these differing viewpoints?
To start, it's critical to acknowledge that the recovery from the COVID-19 pandemic has been unique by any standard
In this unprecedented period, historical correlations among economic variables are unreliable for forecastingNot surprisingly, those who base their predictions on business indicators foresee a looming recession, while those focused on consumer metrics (including the Federal Reserve) anticipate a more prolonged soft landing.
Our stance lies somewhere in between these extremesWe assert that both supply and demand forces in the economy will converge within the labor marketHistorically interpreted trends indicate a robust labor market, yet there are signs that this trend is beginning to softenWe suspect that this will continue, resulting in a more pronounced economic slowdown in the coming monthsWhether a recession will ensue remains an open question; if it does materialize, it could be mild.
Contrasting Business Outlook versus Strong Consumer Data
There is no denying that businesses are currently skeptical about the economic outlook
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A reliable indicator of the corporate sentiment is the Institute for Supply Management (ISM)'s manufacturing survey indexAlthough the index has not yet reached recessionary levels, it is trending toward such a situation.
From the banks’ perspective, the environment also appears to be deterioratingLending standards have tightened, a common occurrence when the economy nears a recessionHowever, what's particularly intriguing is the reported significant decline in loan demand from businesses of all sizesThis downward trend indicates that companies are reluctant to pursue expansion in what they perceive to be a faltering economic climate.
Conversely, consumers seem to be thriving in a markedly different economic environment
Despite the dip in business confidence, consumer sentiment has risen sharply in recent months, now exceeding long-term averages.
What accounts for this phenomenon? We believe it is closely tied to inflation dynamicsWhile it's true that inflation rates remain significantly elevated compared to historical norms, the overall inflation rate, including energy costs, has decreased from over 6% earlier this year to around 3% todayThis drop has helped boost household incomes, subsequently lifting consumer confidence.
Anticipated Growth in U.SGDP over the Next 18 Months
Long-Term Growth Trends Gradually Slowing
Will this trend continue? It is uncertain.
Starting with the positives, we expect additional anti-inflation measures to materialize, and we predict the Federal Reserve will achieve its 2% inflation target sometime in 2024. Yet, consider that inflation has already fallen by more than 3% over the past six months
A further decline of 1% over the next 18 months may not deliver a similarly positive impact on consumer confidence.
Turning to the labor market, we anticipate some slowdownWage growth has already decreased by about 1.5 percentage points this year — roughly half the pace of inflation's decline, and we believe it will likely continue to waneWith inflation decreasing, the pressure on businesses to raise wages is expected to lessen.
In addition to the slowdown in wage increases, we are witnessing broader signs of cooling in the labor marketThe number of job vacancies has begun to drop, and hiring rates have also decreased over the past year.
It is important to note that the labor market remains robust
Even though there are signs that the U.Seconomy is slowing, there is still a considerable distance to coverTherefore, while we anticipate this trend will continue, we do not foresee consumer confidence dropping to the level of corporate pessimism.
Rather, we expect these two data sets to intersect somewhere in betweenConsumer spending in the coming months will support businesses, potentially altering their perception of the economyAs the labor market cools, U.Shouseholds may feel their situation is deterioratingThis combination suggests that rather than overly focusing on one side of the equation, it is more insightful to recognize the nuances: the situation isn’t as dire as businesses believe, nor as rosy as consumers may think.
As for our outlook, the sum of all these variables indicates that GDP growth over the next 18 months will remain positive, albeit with long-term growth trends gradually slowing.
(The views expressed in this article are solely those of the author and do not represent the stance of this publication.)