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US Durable Goods: Recession Fears Over?

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Durable goods orders are seen as a relatively good indicator of whether the economy is headed for a slowdown. This is particularly relevant for the US at the moment, because there are conflicting signs in the data. Many economists last year had forecast that the US would already be in a recession by now. But that hasn’t come about – yet.

In fact, the Atlanta Fed’s GDPNow forecast tool is predicting that the US will get 1.9% annual growth in the second quarter. For comparable purposes to other economies, that’s around 0.5% quarterly. The Eurozone fell into a recession with last quarter’s growth of -0.1%, the second in a row. The UK grew by 0.1% last quarter, and narrowly avoided a recession.

Leading the pack?

US economic performance is ahead of many of its peers, but there are still troubling signs. Because of the see-saw nature of US economic data, investors are waiting for each release with bated breath. And markets tend to shift back and forth as there isn’t a consistent narrative of the economy growing steadily, or that the economy is heading into trouble.

The market keeps predicting a recession, which can be measured by the yield curve inversion. This is a mechanism that has accurately predicted all of the recession since the 1960s, when it was first invented. Essentially, it shows that investors are betting that interest rates will be much lower in the near future. That means investors are betting a lot of money that the Fed will substantially cut rates within the next 24 months, which it would do to prop up the economy in the face of a recession. Even the Fed acknowledges that at least a minor recession is a high probability in that time frame.

The good signs?

The yield curve inverted around the middle of last year, which fueled the speculation of a recession. But history shows that the “predicted” recession that comes after the inversion can take up to two years – in other words, there is still plenty of time for the recession forecast to still be correct. Additionally, typically, the cure un-inverts a few months before the official start of the recession. And that has not happened yet.

Recent data shows that manufacturing production has been negative, a sign of a recession. But jobs numbers remain strong, which continues to prop up personal spending. With the largest component of the US economy – the consumer – still going strong, then the momentum hasn’t gathered to push a regression.

What about the other sectors?

This is where durable goods come in. If businesses expect the economy to keep doing well, then they will increase spending on long-term investments to grow. This can be a self-fulfilling prophecy as higher spending produces increased activity, which maintains economic dynamism.

US May durable goods are expected to fall by 0.9% compared to growth of 1.1% last year. But that’s seen as being affected by defense spending, which was thrown into a bit of a disarray by the debt ceiling issue in the middle of significant support to Ukraine. Excluding defense, durable goods are expected to increase by 0.5% compared to -0.6% prior. And the prior reading – April – was a bit of a negative outlier due to the fallout from the regional bank collapses in March. In other words, businesses are still spending like they aren’t expecting a recession.

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