In today’s Wall Street Journal, David Malpass notes, “The economy is showing signs of life.” He suggests that the U.S. economy might finally be poised to move beyond the sluggish average growth rate of 2% that has characterized the post-2009 landscape. This optimistic perspective, while no longer an outlier among economists, stands in stark contrast to his predictions from just ten months ago. In September 2012, Malpass warned that “economic signals point to a 2013 recession,” highlighting alarming declines in new durable goods orders and real personal income as indicators of a looming downturn. However, as history unfolded, the recession he projected never materialized. In fact, as I’ve been discussing for some time (including last week’s macro update), the risk of recession remains low. This raises an important question: How did Malpass—and several other economists—interpret the macroeconomic signals so incorrectly late last year? Seeking the answer will shed light on the effectiveness of current methodologies in assessing recession risks in real-time.
After a turbulent June that impacted asset prices, the recent weeks have shown stability across various asset classes. Year-to-date losses have diminished for the worst performers, while those that showed gains are rebounding modestly this month. Although the range of returns remains broad, there appears to be a more favorable tilt towards positive returns compared to recent trends.
According to the recent Chicago Fed National Activity Index, the U.S. economy exhibited a marginally stronger growth rate in June, driven by better performance in production-related metrics. This improvement raised the three-month moving average (CFNAI-MA3) to -0.26, up from a revised -0.37 in May. The latest figure slightly surpasses my average econometric forecast for this index.
For the first time since early February, inflation expectations are once again aligning with movements in the U.S. stock market. This re-emergence of the so-called “new abnormal” follows a four-month period where both investors and economists were puzzled by the implications for markets and the macroeconomic landscape. While it’s still too soon to make definitive conclusions, recent weeks suggest a return to trends in which increases in the stock market correspond with rising inflation expectations, as evidenced by the yield differential between nominal and inflation-indexed 10-year Treasuries.
● What Went Wrong: How the 1% Hijacked the American Middle Class . . . and What Other Countries Got Right
By George R. Tyler
Review via Publishers Weekly
In his debut book, Tyler, a former deputy assistant treasury secretary during the Clinton administration, critiques society’s acceptance of stagnant wages, domineering CEOs, and a shrinking national net worth. He contrasts the approach of “family capitalism,” which focuses on fair pay, job retraining, and productivity growth, with the growing income inequality in the U.S. that undermines economic mobility and fosters poverty. Tyler argues that the Reagan era marked the onset of the decline of middle-class prosperity, a trend that has seen little progression since. He believes an essential step towards revitalization would be to increase wages for lower-income families, pointing to Australia and Europe as examples where economic growth and adequate wages coexist harmoniously. Regardless of the validity of his suggestions, the data he presents strongly supports widespread concern about America’s trajectory. He emphasizes that the core issue is not merely the size of government but rather wealth distribution.
The Chicago Fed National Activity Index (CFNAI) is projected to show a slight increase to -0.39 in the upcoming June report, as per The Capital Spectator’s average econometric forecast. This is a modest improvement from May’s reported three-month average of -0.43. According to Chicago Fed guidelines, a figure below -0.70 indicates a heightened likelihood of a recession. The current estimate suggests that the CFNAI three-month average will remain at a level historically associated with economic expansion, although it is below the trend rate. The update for June is set to be released on Monday, July 22.
According to the June update of the Economic Trend (ETI) and Momentum indexes (EMI), business cycle risks remain low. Both measures, which evaluate the overall economic trend through 14 economic and financial indicators, are well above their respective danger thresholds. Consequently, the NBER is unlikely to categorize June as the onset of a new recession, based on the available data.
Recent data indicates a notable decline in new unemployment benefit filings, which fell by 24,000 to a seasonally adjusted total of 334,000 for the week ending July 13, marking one of the lowest levels in over five years. The year-over-year comparisons also show an encouraging trend, with unadjusted claims—before seasonal adjustments—decreasing by more than 10% compared to the previous year. This data suggests that the labor market is continuing to recover, reinforcing the notion of steady economic growth in the foreseeable future.
The Census Bureau’s June report reveals a significant decline in residential construction activities. Housing starts plummeted 9.9%, reaching a seasonally adjusted annual rate of 836,000—the lowest figure since last August. Additionally, newly issued building permits also saw a drop, declining by 7.5% when compared to May, further compounding the negative outlook.
Neil Irwin from The Washington Post’s Wonkblog takes a lighthearted jab at hedge funds with a humorous take on a hypothetical investment strategy focused on football betting in Las Vegas. He points out that the anticipated returns “are unaffected by whether the stock market rose or fell that year.” In the investment landscape, assets that exhibit ‘non-correlation’—like his imagined hedge fund—are particularly sought after. Investors prefer options that diverge when market trends fluctuate or at least where those fluctuations appear random.
Conclusion: Overall, the recent economic indicators suggest a mixed bag, with some areas showing signs of recovery while others indicate challenges ahead. Analysts and economists will need to remain vigilant and adapt their forecasts based on evolving data to accurately assess the direction of the U.S. economy. Keeping an eye on these trends will be crucial for making informed decisions moving forward.
