Recession vs. Soft Landing

Major stock market indexes are mixed in early trading, looking for direction. Currently, the Dow is flat and the S&P 500 is down .2%. Industrial commodities are down today (oil -4%; copper -1%), presumably on concerns over global economic growth. Bloomberg News says the oil futures market is signaling “oversupply for the first time in almost a year.” That came out of nowhere. Bonds are selling off again on fears that the Fed will push interest rates higher than expected over the next six months. Trading in the Fed-funds futures market currently implies a terminal rate of about 5% next May vs. 4% now.

Sales of previously owned homes in the US fell 5.9% in October from the prior month. So-called “existing home sales” have been softening for nine straight months now under the pressure of low affordability and rising mortgage rates. The pace of sales is now as bad as it was back in May 2020 just after Covid brought the economy to a screeching halt. Of course, the other side of the coin is that home prices, which have been in outer space for a while now, may come back down to earth. And slower sales have allowed the inventory of homes for sale to begin rising –though still not back to normal. The Nat’l Association of Realtors says that while properties remained on the market for longer last month, they’re still moving at a faster pace than they did before the pandemic.

The Conference Board, a non-profit economic research group, announced disappointing results for its US Leading Index (LEI). This index, a conglomeration of data aimed at predicting the economy’s trajectory over the next six months, fell .8% in October, capping eight straight months of declines. It clearly suggests a loss of economic momentum. In fact, the last several times the index fell this much on a year-over-year basis the country was in recession. The group’s chief economist blamed LEI’s weakness on “consumers’ worsening outlook amid high inflation and rising interest rates, as well as declining prospects for housing construction and manufacturing.” The Conference Board concedes that US economic growth will likely remain positive this year, but believes it may fall negative next year.

Recession in 2023 is indeed the consensus view on Wall Street. And yet, a senior economist at the Federal Reserve says the chances of avoiding a recession are rising. This is odd since most Fed officials remain very hawkish, clinging to the narrative that inflation isn’t really softening and the Fed may have to take interest rates significantly higher. In an interview, Andrea Raffo said inflation is moderating, and yet growth isn’t falling off a cliff. He cited recent reports including the employment cost index, consumer price index, producer price index, retail sales and unemployment that confirm this view. “Marginally, we probably are becoming more confident that we could accomplish [a soft landing].”