Has the world (or the US) dodged a recession?
No. Another recession is always inevitable, it’s just a matter of when, which speaks to a complaint I have about recession forecasting: If a forecast doesn’t have an expiration date, it’s not a forecast. The same is true with equity selloff calls. Either your call has a shelf life, or it’s not properly a “call.”
Viewed through that lens, some recession predictions for the US are a quarter (two at most) away from being proven wrong. Recession calls aren’t “good until canceled,” otherwise they’d always be right by definition.
With that in mind, both SocGen’s derivatives team and Goldman’s economists are skeptical of the notion that a US downturn is imminent. “Recession probabilities continue to be pushed back [and] we have been believers in the cycle based on the elevated levels of corporate profits and very low interest costs,” SocGen’s Jitesh Kumar and Vincent Cassot wrote.
The figure on the right, below, speaks to Albert Edwards’s Thursday remarks about falling interest costs in the face of rising rates.
A combination of fixed-rate debt incurred when rates were low and rising revenues has pushed interest payments as a percentage of corporate top lines to the lowest in decades.
Meanwhile, the “desynchronization” (as Kumar and Cassot put it) between services and manufacturing might’ve been a blessing.
Yes, manufacturing is mired in a downturn, but the strength in services more than compensated, and by the time services activity wanes, factories could take up the slack.
“Going forward, while the services sector may weaken on the margin, leading indicators such as new order/inventory ratios suggest that the manufacturing sector may be on the verge of turning up,” Kumar and Cassot went on.
At the same time, earnings revisions have inflected and a measure of earnings uncertainty has receded with implied vol. For SocGen, it’s still too early to play for a recession with defensives or by cutting risk. “We think we are still a few quarters away,” Kumar and Cassot said.
In the eyes of Goldman analysts including Spencer Hill, the US economy may be reaccelerating. “Official data indicate that domestic demand growth picked up sharply in Q1, and with two months of data in hand, is tracking at +2.6% for Q2,” they wrote, noting that GDP for the first half of the year is likely to come in above-potential on an annualized basis.
Hill cited “high-frequency data from alternative sources,” calling the message “upbeat.” Goldman seasonally adjusted weekly figures on card spending, housing demand and industrial freight through early July, and discovered that “consumer spending continues to grow, manufacturing activity is currently bottoming or rebounding and the large declines in housing activity appear mostly behind us.”
All in all, Goldman suspects Q4/Q4 GDP in the US will be more robust this year than last.
SocGen and Goldman offered conceptually similar takes on the legacy of March’s bank drama. “While the spring bank failures seemed to reduce the odds [that economic growth could improve], our review of official and alternative data suggests that this growth rebound may have happened anyway,” Goldman’s Hill said.
“As it turns out, the regional bank crisis was not the catalyst that bought the cycle to an end,” Kumar and Cassot wrote, reminding investors that “in fact,” the bank mini-crisis “proved to be the catalyst for the next leg down in equity volatility.”
