Are We There Yet?

If you’ve taken summer driving trips with kids, then you have heard these five words, repeatedly. Are we there yet?  Most investors have also been asking a similar question. Is a recession here yet?

After multiple bank failures in March, even I fell for it, to be honest.  However, after two bad months, economic data has bounced back.  ‘The Fed has raised interest rates above 5% and therefore a recession is imminent’ view has so far proven to be incorrect. Our economy just isn’t as interest rate sensitive, as in the past.  However, there are other factors also at play.

​Here are 5 important economic metrics that indicate the U.S. economy is steady.

Chart 1: Consumer Surplus: Income (white line) is rising faster than expenses (orange line)

Source – Bloomberg

Inflation is falling, and falling faster than most believe.  Falling inflation provides a big surplus to the engine of the US economy, the consumer.  As you can see in Chart 1, while wages are growing by 4% (white line), inflation is now growing less than 2% (orange line).

Chart 2: U.S. Savings Rate Is Growing Again

Source – St Louis Fed
​
The savings rate fell all throughout 2021 and 2022.  Rising inflation had a big part to play as households had to support their spending by tapping into savings.  However, that trend changed late in 2022.  Households are building their savings pool again, explained in Chart 1.  This is a healthy and sustainable development.  The growing narrative that the consumer is quickly running out of savings cannot be validated anymore. 

Chart 3: Employment is Strong

Source – Bloomberg
​
Despite rising layoffs, unemployment claims (Chart 3) - a leading indicator that signals a future rise in unemployment - are at record lows.  Therefore, laid-off employees are finding new jobs rather easily.  While bank failures led to a rise in claims and job losses, they quickly reversed.  Historically, a spike in claims above 300,000 is a marker for trouble in the labor market.  Today, we sit at historic lows. 

Chart 4: Restaurant Sales Are Steady

Source –  Census.gov
​
Jobs are plentiful, wages are rising, and grocery prices are falling.  Restaurants are a beneficiary of this consumer surplus, and sales are steady.  Eating out spending is the best coincident indicator of our economy.  Executives of large casual dining chains I speak with regularly indicate no change in consumer behavior despite large menu price increases. 

Chart 5: Budget Deficit Is Growing

Source –  Bloomberg

The Federal Govt. announced a decade-long plan to invest $2 Trillion to address infrastructure, renewables, CHIPs, and electrification.  This is a massive and sustainable stimulus to the economy.  The initial funds started to seep into the economy starting 2H 2022. Infrastructure investments have a large, offsetting effect on interest rate increases.  As a result, the deficit has grown from 4% to 8% over the past year. Over the long term, this is negative for the U.S. dollar.  However, this also means more construction, more high paying field jobs, and faster GDP growth over the rest of the decade. 

Today, the U.S. economy is steady.  With inflation much closer to benign levels than most believe, the likelihood that the Fed is done with rate hikes is high.  In this case, most investors are asking the wrong question.  The question most should ask is, how high can this bull market go?