Restructuring Activity Stays Elevated Even as Recession Seems Less Likely

It is impossible to reflect on the current state of the U.S. economy without recognizing how off the mark recession calls have been since 2022. It was only a year ago that two-thirds of economists regularly polled by Bloomberg expected a U.S. recession within a year. Even today that percentage is still a lofty 30%, though scant evidence of an impending downturn is found in macroeconomic data or in plain sight, notwithstanding the weaker-than-expected advance GDP report for 1Q24. It’s not just economists who have been errant in this call. Credit markets have gotten it wrong too, with the yield between two-year and 10-year Treasuries running negative for two years. That particular yield curve inversion has been a widely followed indicator of recession for decades, but not this time — at least not yet. The U.S. economy is not entirely out of the woods with respect to a recession scenario, but even if such an outcome were to materialize in late 2024 or 2025, it would hardly vindicate those making this call since 2022. There is an adage that says somebody who keeps making the same prediction eventually will be right.

Nearly two years of the most aggressive monetary tightening by the Fed since the Volcker years of the early 1980s has failed to sufficiently slow the U.S. economy in the aggregate or slay the inflation dragon, though pockets of the domestic economy certainly are hurting. U.S. GDP real growth estimates for 2024 consistently have been revised upward since late 2023 — to 2.4% currently — and it is widely agreed that the U.S. economy is outperforming most industrialized nations even with interest rates near two-decade highs. These aren’t stellar growth results or high expectations but certainly they are respectable, all things considered. Economists and markets alike are long known to overpredict recessions,1 so this benign backdrop is not entirely surprising. However, if ever all the ingredients were in place for economic stagnation or downturn it was during the last two years, so the resilience of the U.S. economy in the face of these multifront challenges is impressive.

Continue to Full Article >>