- The economy is sending mixed signals about a potential recession in the near future, according to Ned Davis Research.
- While real estate and manufacturing sector indicators are giving off early-cycle vibes, the unemployment rate signals a late-cycle economy.
- The conflicting data suggests the Fed should place less emphasis on when it will cut interest rates.
The U.S. economy is sending mixed signals about when the next recession will occur.
According to a recent note from Ned Davis Research, depending on the indicator examined, some give the impression of an economy that is in an early expansion cycle, while others suggest that the economy is at the end of its cycle. with a recession looming.
For example, the economy’s leading index recently hit its lowest level after a nearly two-year decline, suggesting that the economy is in the early stages of an expansion phase. Other economic indicators that measure manufacturing activity have improved recently and argue for a long period of economic growth.
But on the other hand, near-record high unemployment rates and extremely tight credit spreads are consistent with what happens just before an economic recession arrives.
“The pandemic and the enormous policy responses of monetary and fiscal authorities have created distortions from normal economic behavior. The economy is rebalancing to eliminate these distortions. But this rebalancing manifests itself in different ways and in different indicators “, said the NDR strategist. Joseph Kalish said.
This distortion is partly explained by the fact that the Fed’s monetary policy has had less impact on the economy as a whole in recent years, given that significant interest rate hikes in 2022 and 2023 do not have failed to cause a widespread slowdown. in economic growth.
“Monetary policy has been much less effective in the United States than in other economies such as Europe. The increased reliance on long-term, fixed-rate debt in the United States has led to massive refinancing by households and businesses during the pandemic,” Kalish said. explain.
The mismatch in economic indicators means the Federal Reserve must be incredibly flexible in its interest rate decisions, Kalish said, adding that it should downplay the importance of when it might cut interest rates .
“Powell should downplay the first rate cut as a significant step and assert that Fed policy will be flexible and adjust to economic conditions and the changing outlook,” Kalish said.
This advice seems particularly poignant after the release of the hotter-than-expected March CPI report, which dropped the likelihood of a first Fed interest rate cut in June from 50% to around 20%. and pushed the probability of a rate cut to around 20%. July.
businessinsider
