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The economy may be in a ‘rolling recession’




The much-anticipated 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 it says about the state of the US economy.

“We call it a rolling 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.

“Obviously commercial real estate is in recession,” he said. “Some of our manufacturing, basic consumer manufacturing is in recession right now.”[ads1];

The economy may be in a ‘rolling recession’

Commercial real estate has been hit hard during a shift to hybrid and remote work. REUTERS/Karen Ducey

“They are shrinking businesses in the United States … but the overall economy is not,” he explained.

In fact, the latest S&P Global US manufacturing PMI came in at 46.3 versus 48.5 expected. Anything below level 50 is contraction. Still, the survey data pointed to an economy that continues to expand.

“Interest rates affect everything”

The Federal Reserve’s task of cooling the economy through rapid rate hikes to curb inflation has not been easy. Economists say that the longer interest rates stay at this level, the more likely it is that other sectors will be affected.

“Rates ultimately affect everything,” Bailin said. “Small and medium-sized companies that need capital are now at a disadvantage. It will eventually limit their growth or cause them to lay off people, or cause them to go bankrupt.”

Although the labor market is slowing, it continues to add jobs. In May, 399,000 jobs were created, topping Wall Street’s estimate of 195,000. Unemployment in the US stands at 3.7 percent.

“I think the labor market hit is still coming,” Charles Schwab investment strategist Liz Ann Sonders told Yahoo Finance earlier this month.

“I think in the next month or two…I think what companies say about their cost structure, particularly labor, will be an important indicator, whether that’s the potential proverbial next shoe to drop,” she added.

Until larger cracks begin to appear, some strategists are wary of calling it a near-term recession.

“We lowered our assessment of the probability that the US economy will enter a recession in 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 housing sector as an indicator that it is too early to make recession calls.

“We do not believe that we will enter a recession in the US in the near term as the US housing sector is resilient due to a lack of homes for sale,” Hatfield said.

Another sign of strength is consumer spending. May’s retail sales, which are not adjusted for inflation, rose 0.3% month-on-month, against estimates for a 0.2% decline.

“Contrary to expectations, the May retail sales headline shows that consumer spending remains resilient,” Oren Klachkin, chief U.S. economist at Oxford Economics, wrote in a recent note.

U.S. Federal Reserve Chairman Jerome Powell leaves a press conference following the release of the Fed's policy decision to keep interest rates unchanged, at the Federal Reserve in Washington, U.S., June 14, 2023. REUTERS/Kevin Lamarque

U.S. Federal Reserve Chairman Jerome Powell leaves a press conference following the release of the Fed’s policy decision to keep interest rates unchanged, at the Federal Reserve in Washington, U.S., June 14, 2023. REUTERS/Kevin Lamarque

He added, “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 halted its interest rate hikes, but warned that one or two more increases could come later this year to continue the fight against inflation.

On Thursday, Fed Chair Jerome Powell reiterated to lawmakers that the central bank expects to raise interest rates again, but at a slower pace to avoid tipping the economy into recession.

Ines Ferre is a senior business reporter at Yahoo Finance. You can follow her on Twitter @ines_ferre

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