Is the U.S. economy strong enough to avoid a downturn?
► Turkish data signals the same scenario; still recession. So, I look at the U.S. here.
► As one may recall, Larry Summers had talked about a nearing recession, probably. Fed responded to similar calls, and is on hold. However, the downturn isn’t that obvious, at least not yet.
► Except a very narrow spread between 2- and 10-year T-bills, that is an omen indicative of an inverted yield curve, there are no strong weakening signals. The market may not be pricing in objective signals, but what it expects to be incoming omens.
► The labor market is, perhaps not flamboyant, but strong. Housing is going well, if only on account of recently declining mortgage rates. Wage growth is firming gradually, and this is a statistic supportive of a vibrant housing market. Unemployment is staying flat.
► There are also negative signals. For one thing, durable goods expenditures edged down, second month in a row. Retail is slowing also. Capital goods expenditures remain soft. In short, there is loss of momentum perhaps, but not an outright downturn. A recession-to-be isn’t in the cards yet. ► Stock markets can be an indicator, but they can be an indicator if and only if they precede an independently developing business cycle through. In this case, stock prices fall, and weakness spreads over. Yet, equity prices actually rose last month. Volatility is low as the relevant graphic depicts.
► The last two episodes of implied volatility spikes took place in 2018, in February and in December. On both occasions, the sentiment turned sour. Yet, the current volatility is almost one third of what it was back then. Long-term stock prices don’t signal much of a downturn either. Well, the Fed may indeed have acted precipitously, taking precautions beforehand and aiming at not staying behind the curve. We will see within a couple of months which is which.