US Economy Isn’t Crashing

Stocks opened higher today, building on yesterday’s rally. The session is heavily tilted toward tech stocks (+2.3%). On the other hand, bonds are selling off as interest rates move higher. Investors seem pretty well convinced that the debt ceiling crisis will be resolved, and that the economy isn’t crashing.

Despite persistent and loud recession calls from Wall Street economists, recent data seem to confirm strength in the economy. Those calls are being pushed forward yet again. I wonder if we should stop using terms like recession, because it implies a scenario in which everything is bad. And so far, the post-Covid world has proven much more nuanced.

The Atlanta Federal Reserve Bank’s GDP tracker suggests second quarter US economic growth is tracking to 1.9%. That’s not only positive, but it’s also higher than the prior quarter’s 1.3%. S&P’s US Services Index unexpectedly bounced back to 55.1 this month, suggesting healthy business activity. This is crucial because services represent over 70% of the US economy. And new home sales continue to rebound from last summer’s lows. The volume of transactions rose 4.1% in April to an annualized rate of 683,000. This comes as new home prices fall but inventory remains low. We also learned today that corporate capital spending rebounded this month. New orders for durable goods excluding defense equipment and aircraft returned to positive growth after two months of contraction. And finally, consumer incomes & spending remain healthy. The Bureau of Economic Analysis said personal Incomes are up 5.4% from a year ago, and spending is up 6.7%.

Now, while those reports prove the economy isn’t falling off a cliff, they also unfortunately hint at more interest rate hikes by the Federal Reserve. Stronger growth could keep inflation on the high side, and may lead to higher rates. Of course, some Fed officials have hinted that monetary tightening is now on pause, and shocks like the recent banking crisis certainly call for a halt to rate hikes. The current Fed-funds interest rate range is 5.0 – 5.25%, which is roughly where the Fed said it would stop. We’ll have to wait for next month’s Fed meeting for proof.