How is the US economy doing? Facts, figures, analyzes and scenarios. Comment from Diana Wagner, Equity Portfolio Manager at Capital Group
Is the US economy in recession or not? This is the question many investors are asking, as US GDP fell for two straight quarters in the first half of the year, a well-known definition of a recession.
However, with steady job growth, the unemployment rate at record lows and strong consumption growth, it doesn’t look like a recession that most people will remember. So what is the result?
It depends on the interlocutor. With food, energy, and housing prices rising faster than wages, the average American consumer would likely say yes. In our opinion, we are either on the verge of a recession or are already entering a recession.
The official arbiter of US recessions, the National Bureau of Economic Research (NBER), is taking some time to give its opinion. The organization takes into account many factors in addition to GDP, including employment levels, household income, and industrial production. Since NBER typically doesn’t release its results until six to nine months after the start of a recession, the official announcement may not come until next year.
It’s fair to say that most consumers probably don’t care what NBER thinks. They see inflation exceeding 9%, a rise in energy prices and a decline in home sales. They feel the impact of this data. The job market is one of the only data that does not indicate a recession at the moment.
However, these figures reflect the imbalance between supply and demand in an economy that has not yet fully recovered from the pandemic. More job seekers are expected to return in the coming months. This would lead to a higher unemployment rate as companies cut back on hiring.
On the other hand, consumer spending increased by 1.1% in June. On the surface, this is a very positive number, but adjusted for inflation in general. It also reflects higher spending on consumer staples, such as health care and housing, and masks declines in consumer discretionary categories such as clothing and leisure.
Another worrying sign is the rapid decline in new home sales. With the Federal Reserve raising interest rates dramatically to fight inflation, mortgage rates have soared in recent months, prompting a sharp reaction in the housing market.
New single-family home purchases fell 8.1% last month, the largest drop in more than two years. Home sales fell 5.4%, the fifth consecutive month of decline. Moreover, the exponential increase in home prices during the pandemic raises concerns about a potentially painful correction.
If we are heading into a recession, the upside could be a reflection of the intense inflationary pressures we have seen over the past year. In fact, some argue that inflation has gotten so out of control that a major recession may be needed to bring it back to the Fed’s 2% target.
Are we then in a new inflationary system? In our opinion, no. Consumer prices are likely to decline in the coming months due to recession and lower demand. In this case, the bond market may be past its worst as the Federal Reserve considers whether it can continue to raise interest rates in the face of an economic downturn. In fact, the bond market is already pricing in expectations that the Federal Reserve will cut interest rates multiple times in 2023.
There are many signs that inflation has peaked, such as the drop in gasoline prices since mid-June and wheat, corn and other commodities since mid-May. This could give the Fed the support it needs to sustain economic growth while still taking inflation seriously.
Meanwhile, we expect more volatility as the market adjusts to tighter monetary policy. For portfolios, this means turning to high-quality investments, including US Treasurys and agency mortgage-backed securities, but also looking for opportunities in corporate bonds and emerging markets, as investors are compensated for the rising risks of a recession.
Similarly, in the stock markets, finding high-quality companies with steady cash flows and reliable profit margins is crucial to weathering downturns. Companies with strong and growing profits are particularly attractive.
Against this backdrop, we are keen to invest in companies whose fundamentals will hold up relatively better. Pricing strength and stable demand are important.
We prefer a relatively focused portfolio, which is suitable for all seasons and able to perform in different market environments. Our core holdings are healthcare, software and insurance companies. We’re also looking at consumer goods, but you have to be very selective in that area because some valuations have gone up quite a bit.
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