Is the US economy still heading for recession?
- Explain the lags associated with monetary policy
- Understand the reasons why the US economy has performed robustly so far
- Identify why asset prices have responded as they have this year
- Explain the lags associated with monetary policy
- Understand the reasons why the US economy has performed robustly so far
- Identify why asset prices have responded as they have this year
This year should have been the year of either the hard landing or the soft landing. Instead, 2023 is set to become the year of no landing, and for many that adopted a defensive stance in financial portfolios one year ago, this has been really uncomfortable.
According to IMF projections, global growth should approach 3 per cent and that of advanced countries 1.5 per cent — with 2.1 per cent for the US and 0.7 per cent for the eurozone.
The resilience of the global economy has been remarkable and the US third-quarter earnings season should be relatively strong. Activity data has largely surprised to the upside year to date, and leading indicators, such as earning revisions by analysts, point to the likelihood of a greater-than-average proportion of earnings per share beats during the season.
The robust job growth in September is testament to the resilience of US activity.
In a way, we can say that Jerome Powell has succeeded in his challenge of being able to achieve a restrictive monetary policy to tame inflation without causing a contraction in activity, at least for the moment.
Risks for 2024 are piling up, especially with the lag effect of previous interest rate increases. The big question now is the severity of the economic downturn to come.
The robustness of the global economy and advanced countries in 2023 is the result of several seemingly temporary factors that are fading: fiscal largesse, excess of savings and cash, and the recovery in services and positive real wage growth. Above all, the impact of the central banks’ rate hikes so far is clearly yet to come.
Indeed, despite the most aggressive programme of rate increases in 40 years — 500 basis points in 13 months — the US Federal Reserve is still confronted with a booming job market and historically low unemployment.
Only time will tell
A large body of research tells us it can take, on average, 18 months (the lag is long) to two years or more for tighter monetary policy to materially affect inflation and real activity, and that time can differ unpredictably across episodes (the lag is variable). Post-Covid, there are good reasons for that lag to be longer than usual.
Despite the most aggressive programme of rate increases in 40 years, the US Federal Reserve is still confronted with a booming job market and historically low unemployment