Customers hold the US headed for a recession. It is getting more durable

An employment sign and for sale sign are on display at a retail store in Carlsbad, California on May 25, 2023.

Mike Blake | Reuters

The widely forecast US recession remains out of sight as the first half of 2023 ends, but the consumer sector, which has fueled a notable recovery from pandemic-related shutdowns, may finally be showing signs of slowing down.

The signals that economists rely on to gauge the likelihood of a recession are currently conflicting. The yield curve remains heavily inverted and manufacturing surveys have been signaling a recession for months. But layoffs, mostly focused on the tech sector, haven’t been widespread so far, and there are consumer-heavy areas like travel that are looking like an outright boom.

With the Federal Reserve expected to refrain from raising interest rates at its next meeting, hopes of a so-called “soft landing” for the economy are reviving. On Tuesday, Goldman Sachs cut its probability of a US recession in the next 12 months to just 25%.

But can the strong consumer sector hold its own if pandemic-era savings dwindle and interest rates remain high? Not everyone is convinced, and some Wall Street strategists and economists argue that a recession is only a matter of time as the central bank tries to curb inflation — and there’s plenty of evidence to support this pessimistic argument.

“Expansion in the US and globally is on solid footing and fears of an impending recession seem overdone. That’s the message of the latest releases, which show a surprise rise in global manufacturing PMI, along with strong gains in US goods spending and employment. But this data also suggests that the groundwork is being laid for an end to the expansion,” said Marko Kolanovic, global market strategist at JPMorgan, in a note to clients on Monday.

The confusing consumer

The housing market is one of the most important indicators of the US consumer and economy, but also one of the most confusing.

Despite higher mortgage rates and a regional banking crisis, new home sales have indeed picked up again in recent months, reversing some of last year’s sharp slowdown.

However, this time it may not be a good indicator of consumer health. The number of existing homes coming onto the market has fallen dramatically, adding to the nationwide housing shortage and potentially making demand appear stronger than it actually is.

“Once you own a home and take out a 2.8% 30-year mortgage, it’s the best deal of your life. If you don’t have to move, you won’t move,” said Lauren Goodwin, economist and portfolio strategist at New York Life Investments.

There are also conflicting signals from big consumer companies. Goal warned of sluggish sales last month and dollar general‘s stock plummeted on June 1 after the discounter lowered its full-year guidance.

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Dollar General stock fell sharply after the retailer lowered its full-year outlook.

On the other hand, American Airlines On May 31, the company raised its earnings forecast, citing stronger demand and cheaper fuel. And luxury clothing brand Lululemon beat first fiscal quarter earnings and sales estimates and raised full-year guidance.

This divergence could be a continuation of the post-pandemic economy, which has seen consumers spend in areas like travel while some retailers are caught off guard with their inventory plans. But it could also be a sign that the economic recovery is becoming “K-shaped,” Goodwin said. This means that the different income brackets of consumers differ from each other.

“I wouldn’t dismiss the idea that some companies may have idiosyncratic inventory management issues that the consumer is propagating to the broader economy and higher-income consumers,” she said.

“The breakdown is not just by income segment, but also by age,” Goodwin continued, citing credit card default rates.

“To me, that means this is about wealth and excess savings,” she added.

The last stand of the labor market?

The main source of optimism for the US economy is the job market and continued job growth would buoy low-income consumers and help ward off the K-shaped economy.

Even if there are reports of new rounds of layoffs at large companies metaplatforms, Disney And Goldman SachsMonthly job reports continue to exceed expectations. The April JOLTS report even showed a surprising increase in job openings.

However, Nick Bunker, economic research director for North America at Indeed, said his company’s data showed job vacancies had continued to fall in recent weeks and that the job market had cooled since the recovery began.

“The situation is moderate, although it is still very strong,” said Bunker.

And the May job report was a contradictory document in itself. While the number of employed increased by a surprise 339,000 jobs, the unemployment rate – calculated by another survey – actually rose to 3.7%.

“It’s just one of those bizarre reports. That three-tenths of a percentage point increase in the unemployment rate – I don’t think that’s an accurate picture of the health of the job market. I don’t think the 339,000 jobs we have either.” “Added in a month is an accurate reflection … I wouldn’t get too excited in any way, in my opinion,” Bunker said.

The job market is often viewed as a lagging indicator of economic weakness and it is no guarantee that a recession is not imminent. On Thursday, initial jobless claims surprisingly rose to 261k, possibly a warning sign that job market cracks are starting to widen.

— CNBC’s Michael Bloom contributed coverage.

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