the Economy has momentum --- confidence is up and the market has recovered --- Business confidence is moving in the right direction

(Stephen,frmr Chief U.S. Economist Lehman Brothers, M.S., Economics, George Washington University NumberNomics, “Could We All Have This Wrong?,” pg online @ https://numbernomics.com/could-we-all-have-this-wrong/ //um-ef)

We are beginning to wonder if the economy has a lot more momentum than is generally believed at the moment. Virtually every economist on the planet expects the U.S. economy to slip into recession later this year or early in 2024 because, surely, real interest rates have risen high enough and the yield curve is sufficiently inverted that such an outcome is almost guaranteed. But what if it isn’t? The stock market is telling a different story. Week after week it continues to climb and it is now within 7.0% of its pre-recession, pre-pandemic record high level. The stock market is certainly not anticipating a recession any time soon. This steady run-up in stock prices will do several things. It will boost consumer confidence and, presumably, consumer spending. It will also raise business confidence and give business leaders both the willingness and the ability to quicken investment spending. If all of that happens the economy will grow quickly and it will be substantially more difficult to reduce the core rate of inflation. If that scenario unfolds the Fed will have a lot more work to do than the two additional rate hikes it envisions between now and yearend. Since the pandemic neither the economy nor the inflation rate has behaved in exactly the same way as it did in the past. Could we all have this wrong? One of the reasons for this widespread expectation of a recession stems from the index of leading indicators which has been falling steadily since December 2021. It has been signaling recession for a year and one-half.  This index is the compilation of a dozen indicators each of which are leading indicators.  One of those components is the S&P 500 index.

But the stock market continues to climb.  Week after week it shrugs off the fear of recession, worries about the impact of previous  increases in interest rates, and tighter bank lending standards.  Stock investors are not worried at all about a recession.  Economists are.  Somebody has this wrong.

Right or wrong, the steady increase in stock prices is likely to bolster consumer confidence.  Consumer sentiment for June rose 4.7 points to 63.9 The University of Michigan’s Director of Consumer Surveys, Joanna Hsu, said the following:  “Consumer sentiment lifted 8% in June, reaching its highest level in four months, reflecting greater optimism as inflation eased and policymakers resolved the debt ceiling crisis. The outlook over the economy surged 28% over the short run and 14% over the long run. Sentiment is now 28% above the historic low from a year ago and may be resuming its upward trajectory since then.”  While still at a historically low level its direction now seems to be upward.

We suspect that business confidence will also begin to climb.  The first evidence  of that will presumably show up in the Institute for Supply Management’s purchasing managers’ indexes for the manufacturing and service sectors of the economy for June that will be released in early July.

It is also interesting that economists expectations for the timing of the recession have steadily been pushed farther and farther into the future.  Initially, first quarter GDP growth was expected to be about unchanged.  It ended up at 1.3%.  Second quarter growth was initially expected to be about 1.0%.  We do not yet know what happened to GDP growth in the second quarter but the consensus appears to be about 2.0%.

Each month payroll employment increases more than expected.  The long-awaited slowdown in employment and the associated increase in the unemployment rate remains elusive.  In the most recent 3-month period employment has risen on average 283 thousand.