“Confounding,” is how Fed Reserve Chairman Jerome Powell is characterizing the disparate readings on the U.S. economy.
Economic indicators are all over the map, but one way of understanding the dynamics is to realize the U.S. is in a rolling recession.
Unemployment at 54-Year Low
Jobs are plentiful, with U.S. unemployment of 3.4% at its lowest level in 54 years. U.S. gross domestic product growth of 2.1% in 2022, while low, is still in positive territory. Americans continue spending on discretionary and luxury goods, regardless of 6.5% inflation.
Nevertheless, as CNN reports, technology and finance firms are laying off hundreds of thousands of people, U.S. manufacturing appears to be contracting into a recession, the housing market is tanking and corporate earnings are cracking.
So far this earnings season, 69% of companies that have reported missed analysts’ expectations.
Wall Street and economists are sharply divided on whether the U.S. will enter a recession in 2023.
On Tuesday, Powell tried to reassure investors by admitting the economic indicators, taken together, are simply confusing and the business cycle is problematical for even the Fed to predict.
“This cycle is different from other cycles,” Powell said. “It just has confounded all sorts of attempts to predict.”
One way to make sense of the mixed bag is to realize the pandemic, stimulus spending and pent-up consumer demand have created anomalies.
A Rolling Recession
The result could be that the U.S. is experiencing a rolling recession, says Sung Won Sohn, professor of finance and economics at Loyola Marymount University.
“A rolling recession — where various sectors of the economy take turns contracting rather than simultaneously — is in progress,” the economist attests.
As economists now know, the COVID lockdowns caused people homebound to cut back on services spending and shell out money on goods they could use at home. This fueled hockey-stick growth in companies like Peloton, Zoom and Microsoft and Google cloud computing.
The opening of the economy in 2022 created “pockets of weakness in many categories on the goods side, certainly in housing, that are definitely in recession territory,” says Charles Schwab Chief Investment Strategist Liz Ann Sonders.
What is keeping the U.S. economy from entering a recession is continued spending on services, Sonders believes.
“We continue to think the economy will suffer from rolling recessions — evidenced by the fact that corporate earnings growth is now entering its downturn,” Sonders said in a client note Wednesday.
Pockets of opportunities for investors right now are in quality companies with positive earnings, healthy profit margins and strong balance sheets, Sonders says.
Investors should also seek out actively managed mutual funds with good track records, said Jill Carey Hall, a Bank of America strategist, in a note Tuesday.
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