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US Durable Goods and Recession Outlook

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Tomorrow has the last bit of potentially major market moving data as trading winds down for the holidays. Which means the figures could have implications for how the new year starts, as attention will come back to the economic outlook for the US in particular.

There is still a strong majority of economists who expect the US to fall into a recession next year. That appears to also be the assessment of many CEOs, as the theme from last quarter’s earnings was of cutting guidance and cautionary outlook. But where there is substantial disagreement is just how much of a recession there will be. Many couch those expectations around how the Fed will react to the data as it comes out.

Charting the trend

If businesses expect there to be a recession, they will hold back on investments and try to build up cash to weather the uncertainty. Which means they spend less, contributing to a slowing economy. A market downturn can be something of a self-fulfilling prophecy. Comments from the Fed that interest rates will keep rising also contribute to the general gloom.

While expectations of slower growth can lead to slower growth, that usually doesn’t tip over to be a full-blown recession. A so-called “hard landing” implies that the conditions expose an underlying issue that needs a market readjustment. Typically, recessions happen because of an excess of inventories. That can be because businesses got too overconfident and overproduced, or demand has been destroyed (for example, by a prolonged period of high inflation).

Some important indicators

Yesterday’s consumer confidence figures helped boost optimism as they were trending in the right direction to avoid a hard landing. They were for the crucial period leading up to the holidays, in which there is an increase in spending. Consumer confidence hit an eight-month high. Additionally, inflation outlook fell to the lowest level seen in over a year. Both are seen as a sign that the US consumer is still healthy.

The other side of the equation is how much money Americans are actually making and spending. Tomorrow is the release of November Personal Income, which is expected to continue to grow but slow the pace to 0.3%, down from 0.7% prior. Not surprising, personal spending is expected to follow a similar pattern, slowing to 0.2% compared to 0.8% prior.

Slow growth is better than no growth

Also tomorrow is the release of durable goods orders, which shows how confident businesses are in medium-term growth as they invest money on goods that take a long time to give a return on investment. Here things are a little less optimistic, as durable goods orders are expected to turn to negative -0.6% compared to 1.0% growth in the prior month.

However, that is expected to be due to factors outside of the economy, as the core figure which excluded defense spending is expected to remain positive, though grow slower at 0.2% compared to 0.8% prior.

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