Pollack: Still waiting for a downturn

The Monday Morning Quarterback
A quick analysis of important economic data released over the last week

By Elliot D. Pollack & Co

Still waiting for a downturn

Despite months of predictions that the U.S. is on the verge of a recession, the U.S. economy has remained remarkably resilient in 2023. Stubborn inflation and rising interest rates that typically signal the peak of an economic cycle haven’t managed to spark the job-killing downturn that many feared was inevitable. Now one of the country’s leading economists, Mark Zandi of Moody’s Analytics, is making the case that we will not have a recession within the next year. And other economists and investment banks are changing their opinions as well. Goldman Sachs now believes there is just a 25% chance of a recession over the next year. Bank of America is now forecasting that any downturn will be softer and won’t occur until next year.

What we have seen over the past six months is low unemployment and declining inflation. Job growth has continued and there are nearly twice as many jobs available as people on unemployment. Zandi has cited five reasons why the economy could avoid a recession.

1. Excess Savings
   Between the lack of consumer spending during the pandemic and the federal government’s stimulus packages, consumers saved more cash than they typically would have. Savings peaked in 2021 but consumers are still holding on to $500 billion as of May. Consumer spending, which accounts for 70% of GDP, is still increasing, enabling the economy to avoid a recession.
2. Labor Hoarding
   Businesses have struggled to hire and find talent before and after the pandemic. They are avoiding layoffs now because labor shortages will be a persistent problem going forward as the baby boomer generation retires.
3. Light Debt Loads
   Borrowing by both households and businesses has been prudent since the great recession. While household debt is near record highs, consumers are not overly burdened compared to their disposable income.
4. Anchored Inflation Expectations
   While still a burden on households, inflation was down to 4% in May and has been on a downward trajectory for months. The Fed paused its rate increase this month, although additional increases are anticipated by the end of the year. If consumers and businesses believe the Fed will do what is needed to rein in inflation, they will behave accordingly. A more positive outlook – that inflation will recede – will help increase the chances of this outcome.
5. Low Oil Prices
   Recessions since World War II have historically been preceded by a spike in oil prices. That has not occurred this time. Global oil markets have adjusted despite the Ukraine war, easing inflationary pressures. While we could see some price swings as Saudi Arabia cuts output, overall prices seem to have stabilized for now.

Overall, Zandi says declining inflation, stable oil prices, steady consumer finances, and a strong labor market all point to a soft landing. The economy will ultimately slump, but odds are fading that a recession is ahead. Monitoring key indicators over the remainder of the year will determine if this forecast comes true.

U.S. Snapshot:

• The Conference Board’s Leading Economic Indicator declined 0.7% in May for the 14th consecutive month. The decline points to a weaker economy.
• U.S. housing permits rose for the month but remained below last year’s level. Month over month, total permits were up 5.2% while single-family permits were up 4.8%. Both were down more than double-digits on a percentage basis from a year ago. Total starts were up 21.7% month over month.
• Existing home sales continued to stabilize but remained over 20% below last year’s sales volume. The median sales price has increased for four consecutive months to $396,100, still 3.1% below a year ago.

Arizona Snapshot:

• RLBrownReports.com May housing data shows improvement in price, sales, and permitting for both Greater Phoenix and Greater Tucson.
• Greater Phoenix saw a monthly increase in resales, permits and new home closings. The number of resales reached its highest level since June of last year and reported the median sales price at $432,000, about 9% higher than the nationwide average. New home closings outpaced permits for the 12th straight month.
• Greater Tucson saw a similar improvement across the board as well. New home closings and permits were above the levels last year. Resale activity remained below last May’s total but above the monthly average for the year.