The long-awaited recession of 2023 has yet to materialize. Some of the latest economic data points to more signs of strength than weakness.
A strategist has a term for what this says about the state of the US economy.
“We call it a continuing recession,” David Bailin, chief investment officer at Citi Global Wealth Investments, told Yahoo Finance.
He explained how some sectors of the economy are already in decline, while others, such as travel and leisure, are still strong.
“It’s clear that commercial real estate is in a recession,” he said. “Part of our manufacturing, consumer staples manufacturing is in a recession right now.”
“These are declining businesses in the United States … but the overall economy is not,” he explained.
Indeed on Friday, the latest US S&P Global manufacturing PMI came in at 46.3 vs. 48.5 expected. Anything below the 50 level is a contraction. Yet overall, the survey data points to an economy that continues to grow.
“Interest rates affect everything”
The Federal Reserve’s task of cooling the economy through rapid interest rate hikes to bring inflation under control has not been easy. Economists say the longer interest rates remain at this level, the more likely it is that other sectors will be affected.
“Rates ultimately affect everything,” Bailin said. “Small and medium-sized businesses that need capital are now at a disadvantage. This will eventually limit their growth or force them to lay off or close their doors.”
The labor market, although slowing down, continues to create jobs. In May, 399,000 jobs were created, beating Wall Street estimates of 195,000. Unemployment in the United States stands at 3.7%.
“I think the hit to the job market is yet to come,” Liz Ann Sonders, chief investment strategist Charles Schwab, told Yahoo Finance earlier this month.
“I think the next few months or two…I think what companies say about their cost structure, particularly labor, will be a big telltale whether it’s the next potential proverbial shoe to drop,” she added.
Until bigger cracks start to appear, some strategists are hesitant to talk about a near-term recession.
“We have lowered our judgmental probability that the US economy will enter a recession over the next 12 months to 25% (from 35% previously),” Goldman Sachs economists noted earlier this week.
Jay Hatfield, CEO of Infrastructure Capital Management, points to the residential housing sector as an indicator that it’s too early to make recession calls.
“We don’t think we’ll enter a recession in the United States in the near term as the US real estate sector holds up due to a shortage of homes for sale,” Hatfield said.
Another sign of strength is consumer spending. May retail sales, which are not adjusted for inflation, rose 0.3% month on month, against an estimated 0.2% decline.
“Defying expectations, May’s retail sales headline shows that consumer spending remains resilient,” Oren Klachkin, chief US economist at Oxford Economics, wrote in a recent note.
He added that “the recession will be delayed as long as consumers continue to spend”.
For now, the Federal Reserve is playing a balancing act. The central bank suspended rate hikes, but warned that one or two more hikes could come later this year to continue the fight against inflation.
On Thursday, Fed Chairman Jerome Powell reiterated to lawmakers that the central bank plans to raise interest rates again, but at a slower pace to avoid tipping the economy into recession.
Ines Ferre is a senior economics reporter at Yahoo Finance. You can follow her on Twitter @ines_ferre
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