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Where Is the US Economy Heading?

October 1, 2022 | Commentary

  • As the Fed continues to raise policy rates, talk of recession risk grows, but not all recessions are the same.  It is unlikely that if the economy goes into recession the outcomes will be as severe as the Great Financial Crisis (GFC) or COVID-shutdown recessions in 2008 and 2020, respectively.
  • Strength in bank, corporate and consumer balance sheets suggest that the preconditions for an extreme GFC-type recession are not currently present in the United States.
  • A rapidly appreciating dollar reflects the relative advantages of the U.S. economy but it reduces earnings of global companies, makes our exports less competitive, and distorts global capital flows.
  • Equities have been discounting bad economic and earnings news all year.  Paralleling that market, high yield credit spreads have moved from historically narrow levels approaching 3% to current spreads above 5%.  These near average spreads suggest the credit market is not expecting extreme defaults even in a recession.
  • The Fed will likely continue to raise policy rates until they exceed a stabilized rate of inflation, which might not fall much below 4% soon.  That is the concern of the market, but the implications are not necessarily dire.  Business investment to repair supply chain disruptions is growing despite higher rates. The number of initial and continuing unemployment claims have been declining over the last several weeks.  If the U.S. is heading for recession, it is doing so from a much stronger position than it did in 2007.

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