MacroResearchBoard

The Next U.S. Recession: Waiting For Godot? – May 15, 2023

Last week we published a two-part report on the outlook for the U.S. economy and related investment strategy. The reports debunked some of the arguments proposed by those in the recession camp, and examined the various leading indicators and their historical accuracy and, in many cases, flaws. A recession is inevitable at some point, but as we have repeatedly noted over the past year as the recession calls have increased, the cost of capital is not yet sufficiently restrictive to cause broad-based destabilization in the aggregate economy.

The softness in the U.S. economy is more consistent with a post-boom slowdown than the precursor to a recession. Importantly, most of the “hard” activity data was never overly weak and is showing signs of improving.

The U.S. economy has become increasingly resilient over the past 10-15 years, making it much harder to trigger a recession from higher interest rates than is widely perceived. U.S. households have de-levered and the current expansion has not been fueled by credit. Regional banks are a wildcard, but the problems are isolated rather than systemic: the overall U.S. banking sector has solid balance sheets and office-related CRE loans are small compared with the mortgage debt crisis of the late-2000s.

The Fed will soon pause but current significant rate cut expectations are misplaced. Stay short duration. We continue to favor the euro area and emerging Asian equity markets, as well as U.S. large-cap financials, health care and communication services.