For a long time financial analysts have been predicting a recession in the U.S. which has seemed to fail to emerge during 2023 and the start of 2024. This fear was due to many indicators, whether the yield curve inverting, leading economic indicators like the ISM, or simply the rapid increase in interest rates on a large stock of debt.
There have been many different reasons given for this apparent “resilience” in the U.S. economy. However, we believe we may have a relatively unique perspective on the reasons behind this. Many analysts have pointed out that Covid introduced a lot of noise into the economic indicators, due to the extreme readings brought about by the once in a lifetime event. However, beyond simply base effects, there are specific reasons why the classic business cycle indicators haven’t been as clear.
During the Covid lock downs services such as eating out or entertainment were almost non-existant. However, government stimulus and supply disruptions meant there were huge orders for physical goods and manufacturing. This in turn led to large inventory build outs and a subsequent manufacturing slow down, if not outright manufacturing recession. This is likely what lead to a lot of the traditional leading economic indicators slowing down, leading to the prediction of a recession. However, at this time the demand for services and excess savings in the economy kept the economy growing at a steady rate.
This leads us to where we are now, where services are starting to slow and analysts are saying the recession must be imminent. However, inventories have been drawn down, and manufacturers are starting to rebuild production. Leading indictors of inflation seem to be indicating that this is in fact the case, as many of them have started to tick up. It may take a cyclical slow down in both manufacturing and services for a recession to finally appear.
As we’ve said, we believe this view hasn’t been widely vocalized in the financial media, although Darius Dale of 42 Macro recently did point out that the manufacturing cycle is out of sync with the services cycle.