Because of January’s gangbuster unemployment report of 517,000 new payroll jobs and the unemployment rate decline to an all-time low of 3.4 percent, consensus is growing that the US may avoid a recession.
One indicator of a more optimistic outcome is the Atlanta Federal Reserve GDPNow estimate of economic growth that I have been reporting. It has been close to correct over the past two quarters. For instance, it predicted 3.2 percent growth for Q4 2022 and the official final estimate of Q4 from the US Bureau of Economic Analysis (BEA) came in at 2.9 percent.
It is predicting 2.2 percent growth for the first quarter 2023, when last year’s first and second quarter growth was negative (though there was no recession). The GDPNow model estimate for real GDP growth (seasonally adjusted annual rate) in the first quarter of 2023 is 2.2 percent on February 8, up from 2.1 percent on February 7, said its press release.
Why is the Atlanta Fed’s GDPNow estimate of Q1 2023 so optimistic?
Its estimate highlighted increased foreign trade because supply chains have been able to circumvent the Ukraine war and a host of other supply constraints so that US consumers continue to buy cheaper foreign goods, which is also holding down inflation.
The New York Fed has a new Global Supply Chain Pressure Index that tells us supply prices have eased substantially because Asian countries are recovering quickly. For instance, Chinese imports have recovered as they work out of their COVID-induced slowdown.
Bank of America and Goldman Sachs fund managers are finding their clients also see less chance of a recession, as reported on MarketWatch.
The B of A’s latest global fund manager survey found forecasts of a recession have massively dropped since its November 2022 peak, where 77 percent of fund managers said a recession was likely, to 24 percent in February.
“Most fund managers are optimistic on inflation; 83% anticipate lower global CPI in the next year and 47% expect to see lower short-term rates in the next 12 months, the most since March 2020,” said the B of A survey.
Similarly, Goldman Sachs research analysts led by David Kostin, said in a client note on Tuesday that companies in the Russell 3000 index are talking less about an oncoming recession. Their analysis of corporate earnings calls found just 12 percent mentioning the R word.
The well-regarded New York Fed’s consumer expectations report shows inflation expectations in particular ‘well anchored’, i.e., consumers are expecting no surprises.
“Median inflation expectations remained unchanged at the one-year-ahead horizon,” said the NYFed, “decreased by 0.2 percentage point at the three-year-ahead horizon, and increased by 0.1 percentage point at the five-year-ahead horizon, to 5.0%, 2.7% and 2.5%, respectively.”
So we still have an inflation problem. U.S. Treasury Secretary Janet Yellen last week said she saw a path for avoiding a U.S. recession, with inflation coming down significantly and the economy remaining strong, given the strength of the U.S. labor market.
"You don't have a recession when you have 500,000 jobs and the lowest unemployment rate in more than 50 years," Yellen told ABC's Good Morning America program.
Who is right in this crazy year? The developed world has proved resilient in easing supply chains, which will bring down inflation even faster.
Harlan Green © 2023
Follow Harlan Green on Twitter: https://twitter.com/HarlanGreen
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