Josh Schafer – Reporter
Wed, May 24, 2023
Wall Street has been waiting for a recession that hasn’t materialized roughly five months into the year.
Executives at S&P 500 companies are talking about recessions less on earnings calls for the third straight quarter, per FactSet. S&P Global’s flash US composite PMI showed US economic output reached a 13-month high in May. Even the consumer slowdown teased by some companies doesn’t appear widespread quite yet.
“The economy is still on sound ground, with consumers willing to spend and businesses continuing to hire and invest despite fears that a recession is around the corner,” Oxford Economics Lead US Economist Oren Klachkin wrote in a note titled “Recession remains out of sight” on Friday. “We maintain our call for a mild recession to begin in Q3 but see a risk that it might start later. Consumers – the main engine of the US economy – will keep spending so long as incomes continue to rise.”
To be fair, there are still signs of a slowing economy. Just ask Target (TGT) about its consumer discretionary spending or take a look at the guidance cuts from Home Depot (HD) and Lowe’s (LOW). The Conference Board’s Leading Indicator Index (LEI) has fallen 4.4% over the last six months and points to a recession midway through 2023.
But the larger numbers aren’t flashing warning signs. The U.S economy grew 1.1 % in the first quarter, and the Atlanta Fed currently sees 2.9% growth in the second quarter. Retail sales increased in April.
The labor market is still robust with the unemployment rate at its lowest level since 1969. And even inflation, which remains historically high, grew at its slowest pace in two years in the most recent month.
As Baird strategist Michael Antonelli points out, stocks, which are often viewed as forward-looking, don’t seem to be pricing in a recession yet. The S&P 500 remains up nearly 8% this year.
“What does the S&P at 4200 and the 30-year at 4% tell us,” Antonelli told Yahoo Finance Live. “Is that screaming recession? Probably not. Is that screaming boom? Definitely not. Is that screaming slow growth while we deal with inflation? Probably.”
The same could be said for markets predicting interest rate hikes, too. After the last CPI print on May 10, markets priced in a nearly 100% chance of a pause in the Federal Reserve’s interest rate hike campaign at the June meeting. As of Tuesday afternoon, markets had priced in a 67% chance of a pause in June.
Market predictions for rate cuts in November 2023 have scaled back, too. Once at a roughly 75% chance of a cut at the November meeting, markets have now priced in a 56% chance.
“It’s not increasing because of the debt ceiling,” Antonelli said. “It would only increase if economic data was accelerating and inflation was still high.”
BlackRock CIO of fixed income Rick Rieder points to the housing sector where a sector-wide recession over the last year is on the upswing. Homebuilder confidence recently reached at its highest level since July 2022 and new home sales on the rise.
Still even Rieder, who said he “believes the economy is in much better shape than people think,” sees a recession coming at some point.
Perhaps when, and how bad, is what predictions might’ve overstated entering 2023.
“I think (the economy) is moderating,” Rieder told a room full of reporters on Tuesday. “I don’t think it’s a given that we’re going into a deep recession.”