Is The US Headed For A ‘Transitory’ Recession?

Mercifully, US jobless claims retreated in the week to January 22, snapping a streak of increases that suggested labor market momentum might be waning at precisely the wrong time (not that there’s ever a “right” time for the labor market to roll over, but now is a particularly delicate juncture).

Claims fell 30,000 (figure on the left, below) from the prior week’s upwardly-revised level which, you might recall, was already the highest since October.

At 260,000, the latest headline print was better than consensus expected (265,000).

The four week moving average rose to 247,000, the highest since just before Thanksgiving (figure on the right, above). Unadjusted claims fell last week.

The claims numbers were lost in the fog of Fed tasseography and GDP parsing. I’ve indulged in plenty of the former, so it’s only right I dabble in the latter too.

Although the US economy outperformed expectations in the fourth quarter, some were quick to throw cold water on the report. For skeptics, the outsized contribution from inventories (figure below) may not be sustainable.

“Given ongoing supply disruptions we can’t count on this continuing to support growth in coming quarters,” ING’s James Knightley wrote, calling the report “fairly weak” outside of inventories.

Indeed, Knightley said the US economy may be headed for at least one quarter of contraction. “We see a real chance that the US records negative GDP growth,” he went on to caution, in the same note.

In my initial take, I wrote that market participants weren’t likely to focus on the slightly weaker-than-expected personal consumption print. As for the Fed, I suggested policymakers are “predisposed to viewing any weakness in consumption as linked to Omicron and therefore not particularly relevant for policy.”

To the extent that assessment of investor and policymaker predilections is accurate, it could be misguided. Q4’s in-line personal consumption read could (and probably should) be viewed both in the context of front-loaded spending during the quarter (as consumers fretted over the prospect of delays and bare shelves around the holidays) and the demonstrably weak December retail sales report.

Apparently, I’m not totally alone in my thinking. “With January consumer spending unlikely to show meaningful improvement on December, we are penciling in flat consumer spending growth for the quarter even though spending should be much stronger in February and March,” Knightley said Thursday, before warning that there’s a “risk that at least some of the Q4 inventory rebuild unwinds… put[ting] a lot of pressure on private investment, net trade and government spending to get us into positive growth territory.” The simple breakdown (below) illustrates the point.

To reiterate, the Fed is currently assuming any weakness will be ephemeral, and Knightley did strike an upbeat chord when he noted that falling COVID cases may mean consumers reengage in February and March which, when considered with strong household balance sheets and a robust jobs market, “should set us up for a very strong return to vigorous growth in the second quarter.”

Fingers crossed. It’d be supremely ironic if the Fed, while explaining a second (or third) consecutive rate hike in June, were to find itself describing a sudden downturn in the US economy as “transitory.”

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