To understand the strength of US economy, we have to look at US Q1CY23 GDP. The personal consumption expenditures price index, an inflation measure that the Federal Reserve follows closely, had come at 4.2%, ahead of the 3.7% estimate. Beyond the weak headline number due to inventory effect, real final sales to private domestic purchasers (GDP less inventory change, net exports, and government spending) grew at a 2.9% annualized rate in the first quarter, the best reading since the reopening boom of spring 2021. But some recessionphiles will say it’s a backward-looking data. So, we look at ISM manufacturing surveys & prices paid component for April, the worst affected month post SVB. ISM Manufacturing PMI had edged higher to 47.1 better than the market expectation of 46.6. Employment Index had advanced to 50.2 from 46.9 and the Price Paid Index, the input inflation component, jumped to 53.2 from 49.2. Then yesterday, Non-farm productivity numbers which came far lower than estimates & unit labor costs much higher than estimates. Then today’s NFP has seen a AHE (Average Hourly Earning) MoM increase of 0.5% against 0.3% estimates. Almost 10/11 sectors have seen an increase in April payrolls. April came at 253k against estimates of 180k & UR (Unemployment rate) came at multi decade lows of 3.4%. It is very likely that now the April CPI to be released next week on Wednesday will be super hot considering higher AHEs & high unit labor costs. So the US economy is not doing a hard landing as the current swaps seem to be fully confident of (75bps rate cut priced in CY23). Amongst all the S&P 500 companies earnings result for Q1CY23, 81% have beaten estimates. So the corporates are able to maintain margins which are now looking sticky compared to almost fully improved supply chain conditions. Add the strong labor market & elevated AHEs, strong consumer spending, and there is in reality no recession on ground. Yes it’s true that credit conditions will tighten but no one not even fed is certain how it plays out on wages & cpi. The most important sector housing is doing well too with lack of home supply as owners don’t want to let go of low-rate mortgages of post-COVID times. The recession theorists single point of a hard landing is US regional banks. But beyond the 4 already gone down under, others are managing deposits well. Most of these regional banks have 75% deposits insured & have cash at 170% of uninsured deposits. US bank borrowings from fed too has been consistently going down showing little reason for social media-propelled liquidity concerns. So if the real economic data points are still relatively strong, where is the hard landing scenario happening. Perhaps only on social media forwards. If fed can handle 150bn USD BS banks such as FRB /SVB, how come a 40bn USD BS of Pacwest lead to a rare cut in June itself.
Summary: Current recession theme is not at all supported by economic data points.
