The US Skipping a Recession?

The US Skipping a Recession?

As I see it, there are multiple forces playing on the US Economy and Markets right now. We have a situation that is odd, for lack of a better word. We have the markets surging - the S&P 500 hit 31 all-time highs in 2024, and it’s just June. We have an economy that is still resilient in the face of an aggressive hiking cycle and an extended period of high rates. And, we have fiscal policies that have defied all expectations and will continue to do so in an election year, creating what is by many measures a looming debt crisis.

I read somewhere a few days ago that we are “late cycle” in terms of the economy, and therefore the next stage is a recession. Yes, theoretically this is usually how the cycle progresses. So let’s look at what each of the phases in the cycle is supposed to look like and where the US Economy lines up.

Source: Fidelity

  • Growth: Moderating = Late cycle
  • Credit: Begins to Grow and PMIs are improving = Early cycle
  • Earnings: Coming out of a recession for the S&P 500, still in a recession for the Russell 2000 small caps = Late to Early Cycle
  • Policy
  • Business: Sales Growth falls / Equilibrium & Inventories still low but some growth = Mid to Late cycle

Summarized, this looks like this:

Author's estimates

As you can see from the above, we’re in quite a mixed stage of the economic cycle. While many signs point to a late cycle, we have a situation where there are plenty of early cycle factors coming into play as well. One could argue that we are moving from late cycle directly to early cycle, skipping the recession stage.

This is why there are so many calls for a soft landing. Some are talking about skipping to early cycle without a rebound in GDP growth which would indicate a no landing.

Just as well…

Last week, the Congressional Budget Office (CBO) came out with a new set of estimates. They’ve added another $400 billion to the US Fiscal Deficit for FY 2024 and $2.1T for the period between 2025 and 2034, to reach $22.1T

Source: USDebtClock.org

US total debt has risen dramatically, from almost $6 trillion in 2000 to nearly $35 trillion currently. Projections for 2028 suggest total debt could reach $46 trillion, with interest payments surpassing combined Medicare and defense spending. CBO projects debt at $50.7 trillion by 2034, equaling 122% of GDP.

CBO June 2024 report

Debt crises often happen when people suddenly lose confidence in the economy, causing heavily indebted economies to collapse quickly. Because these shifts in confidence are unpredictable, it's hard to know exactly when such crises will occur, but the risk is always there.

All things considered, we better hope that the economy skips the recession because an easing of fiscal policy during a recession will mean more debt and a deeper fiscal deficit.

The Week Ahead

The US PCE inflation numbers will be released on Friday, June 28 and prior to that we have the first televised US presidential debate on Thursday.

Finally, it’s also the month-end next week. If we look at June on a weekly basis, we’ve seen three positive weeks and the market is now overbought and quite likely ready for a reversal. Month-end’s also bring us rebalancing (and this time it would be quarterly rebalancing) and post Options Expiry flows are weak. So we may see some pressure next week, ahead of July which is seasonally a strong month.

The chart below shows us the seasonality for 20 years of performance for the S&P 500.

Source: StockCharts.com



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None of the above is investment advice. Full Disclaimer: https://www.macrovisor.com/c/disclaimer



Laurent Lequeu

Self Employed Independent Financial Consultant-Writer of The Macro Butler Substack

8 个月

Ayesha Tariq, CFA Despite increasing signs of consumer-led stagflation, bulls, brainwashed by the ambient 'Forward Confusion,' are complacently walking on thin ice. https://themacrobutler.substack.com/p/bull-on-thin-ice

Steven Ward

Assistant Vice President, Wealth Management Associate

8 个月

Thanks for posting

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Patrick Reid

Helping late career changers become profitable professional FX traders in 12 months | Talk to a veteran every day | Take the 4 mins test |

8 个月

Thank you Ayesha Tariq, CFA and I personally think it's a little stretched to say US Macro is resilient. The latest figures are pointing much weaker. Sure - it has been the powerhouse for the last 12 months but i do feel that has shifted. CPI, PPI, IJC, Retail Sales and the true jobs indicator - The Kansas Labor Index all weaker - putting the dual mandate in a bind. CPI feeds into PCE so I'm in the camp of another cut priced into OIS/Sofra and I feel USD is only here because of French spreads and fears. This as you know OAT/Bund hit EUR, which lifted USD which is not correlated to weaker US Macro. I'm looking to but EUR at value area lowe into 1.06 the figure. Thanks for your take as always.

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