A shopper carries Foot Locker and Zara shopping bags while walking along the Third Street Promenade in Santa Monica, California, March 20, 2023.

Patrick T. Fallon | Afp | Getty Images

Dare I say it out loud? Has Goldilocks re-entered the building?

The US economy has shown remarkable resilience in the face of 10 consecutive rate hikes by the Federal Reserve, taking short-term interest rates from near zero to 5% in just over a year, prompting recession predictions from many economists and market scientists, including me.

He has an economy, like my long-time friend and colleague, Art Cashin the first time he described it, did he enter the “Goldilocks” phase? The economy is not too strong, not too weak, but just right?

Of course, there was a justification for predicting a recession in the past many months.

As The Fed quickly raised ratesresidential real estate slipped into recession, manufacturing declined, auto sales stalled, and recession market indicators began flashing red.

The yield curve has inverted deeply, marking a recession every time since 1968.

It is true that we are still in the six to fifteen month window in which a recession followed an inversion, but the economy appears to be strengthening, not weakening as might be expected.

Signs of improvement

Leading economic indicators have been negative for more than a year. We’ve never had an LEI drop without a recession hitting the economy…same goes for a drop in home sales.

However, GDP for the first quarter has been revised up to show a 2% annual growth rate.

The unemployment rate remains near historic lows and is at an all-time low for people of color.

Construction spending is rising, while the introduction of new technologies involving generative artificial intelligence is bolstering the tech sector and at least potentially ushering in another era of disinflation or, quite possibly, outright deflation.

Where some of us got it wrong, or may have been wrong—the jury is still out—is that the economy’s resilience comes from several factors that may have been underestimated even as the Fed has raised rates so quickly and dramatically since early 2022.

First, both businesses and households locked in low long-term interest rates before the Fed began to tighten monetary policy. This would suggest that interest rate sensitivity is lower today than in other tightening cycles.

While it’s true that households locked into 3.5% mortgages are unlikely to sell their homes, reducing the supply of existing home inventory, these homeowners don’t suffer the sticker shock typically associated with rate increases.

So they can spend money without having to pay higher monthly mortgage payments.

The same is true for corporations that have “wiped out” their debt, borrowing cheaply with long-term debt that may not be refinanced anytime soon, giving them more leverage in a slightly slower-growing economy.

Policy help

Equally important, despite expectations to the contrary, fiscal stimulus is back and providing a strong offset to monetary policy tightening.

The CHIPS and Science Act led to a construction boom in advanced manufacturing, with approximately $189 billion spent on building capacity for high-tech goods, primarily advanced computer chips.

A construction boom is also underway in residential property, helping to ease the ongoing shortage of new home supply across the country.

Similarly, Inflation Reduction Act it provides meaningful incentives to power and energy companies to build new energy infrastructure, while also supporting further oil and gas extraction in selected cases.

The US is once again the largest oil producer in the world. It has oil and gasoline prices were kept lowwhich provides consumers with higher disposable income than might be predicted with the ongoing war between Russia and Ukraine, multiple production cuts among OPEC producers, and relatively stable energy demand worldwide.

The result of all this is that among the major industrial nations, the US is growing faster while inflation is falling faster than anywhere else on the planet.

It’s a good story as Independence Day approaches.

America is also becoming economically independent in various ways, which bodes well not only for the near future, but also for the long term.

Now watch, as soon as I submit this column, there will be a recession!

Source Link