For much of the past year, market analysts and forecasters have anticipated that the US economy would succumb to recession, under the weight of rising interest rates. But it hasn’t happened yet, and it is starting to look like it may not happen this year. Positive economic surprises (e.g. the latest inflation and consumer sentiment indicators are boosting confidence).
Goldman Sachs has cut its probability of a US recession in the next 12 months to 20% from 25% due to progress on inflation (see below).
Source: Goldman Sachs
The US reporting season is underway, and so far, so good. Earnings are down, but not as much as feared. And as all know, the market looks forward, not back.
Source: Sam Ro, TKer
Back to the chances of recession. The US economy has surprised with its resilience.
Economic data indicates that US domestic demand growth picked up sharply to +3.5% annualised in Q1 and is tracking at +2.6% for Q2. Gross domestic product (GDP) growth is forecast by Goldman Sachs at +2.2% annualised in the first half of the year, slightly above potential.
Data from alternative sources is also upbeat. Credit card spending, housing demand, and industrial freight indicators in early July are showing that consumer spending continues to grow, manufacturing activity is currently bottoming or rebounding, and the large declines in housing activity appear to have ended. Consumption in discretionary services categories rose at a solid pace in April and May. The job market remains strong.
The Bank of America survey of fund managers in July has 68% of respondents expecting a “soft landing” (versus 21% expecting a hard landing). A turnaround from earlier in the year. But at the same time, one should be wary of extrapolating good economic news to the sharemarket – because it’s likely that share prices already incorporate most information before we read about it on the wires.
Source: Bank of America Global Fund Manager Survey, July 2023
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