Last August, the highly respected Conference Board, which compiles the Leading Economic Index, believed the U.S. economy would not expand in the third quarter of 2022 and “could tip into a short but mild recession by the end of the year or early 2023.”
The Conference Board doubled down last month, forecasting that “a contraction of economic activity” will begin in Q2 and lead to a mild recession by mid-2023.
Nonetheless, the economy expanded at an annualized pace of 3.2% in Q3 2022 and added another 2.6% in Q4 before slowing to 1.3% in Q1 2023, according to the U.S. Bureau of Economic Statistics.
Since January, the economy has added 1.6 million net new jobs, according to U.S. Bureau of Labor Statistics data, including 339,000 new jobs in May.
Neither metric is consistent with the traditional definition of a recession.
Although the year is not yet over, it serves as a reminder that the brightest minds cannot accurately foretell and time future events.
Still, is the jump in the unemployment rate from 3.4% in April to 3.7% in May a concern?
It’s worth pointing out that the unemployment rate is measured by a survey called the household survey. Employment, reported as nonfarm payrolls each month, is calculated via a survey of businesses called the establishment survey.
The U.S. BLS says the household survey includes “self-employed workers whose businesses are unincorporated.” The establishment survey does not.
Self-employed workers whose businesses are unincorporated declined by 369,000 in May. It’s possible that anomalies in the data accounted for the sharp decline and subsequent rise in the jobless rate. June’s unemployment rate should provide additional clarity.
INVESTOR’S CORNER
What does this mean for investors? Well, the resilient labor market and the Fed’s war on inflation all but guaranteed a rate increase at the Fed’s June meeting. Yet, following 10-straight rate hikes, the Fed has decided that it will take a break in June and forgo a hike in interest rates.
Its gentler approach this year, coupled with a pause this month, has supported the major index this year.
Please note, however, that the S&P 500 Index has been aided by the outperformance of a few mega-cap tech stocks. The Dow and the Russell 2000 Index, which measure the performance of small stocks, have lagged.
| Key Index Returns | ||
| Index | MTD % | YTD % |
| Dow Jones Industrial Average | -3.5 | -0.7 |
| Nasdaq Composite | 5.8 | 23.6 |
| S&P 500 Index | 0.3 | 8.9 |
| Russell 2000 Index | -1.1 | -0.7 |
| MSCI World ex – U.S.A.* | -4.9 | 4.6 |
| MSCI Emerging Markets | -1.9 | 0.2 |
| Bloomberg Barclays U.S. Aggregate Bond TR USD | -1.1 | 2.5 |
Source: Wall Street Journal, MSCI.com, MarketWatch, Bloomberg MTD returns: April 28, 2023 –May 31, 2023 YTD returns: December 30, 2022–May 31, 2023
*U.S.D.
DEBT CEILING DRAMA
According to popular belief, if a frog is thrown into boiling water, it will immediately jump out. However, if placed in warm water and the temperature gradually increases, it will eventually perish.
We’ve never tested the hypothesis (nor do we plan to), but it can be used as a metaphor.
The federal deficit is continuously expanding, i.e., the temperature of the water is slowly rising, without any clear indication of when it may pose a threat to financial stability.
However, a hard cap on the total deficit via a decision not to raise the debt ceiling would have had serious consequences. Market reaction would have been swift and dramatic.
Politicians will always posture, but behind closed doors, they recognized the need to strike a deal, however imperfect such a deal might be, and the debt ceiling was raised. Crisis averted.
As an impartial advisor, it is not within our purview to opine on the particulars of the agreement. Our role involves evaluating the market through the narrow lens of an investor’s perspective. You see, the investor assesses the economic fundamentals over a period of roughly six to nine months.
If the U.S. were to default on its debt (T-bills set to mature), it would lead to unpaid bills, a credit downgrade, and severe consequences in both U.S. and global financial markets.
Such consequences would likely lead to economic instability, higher borrowing costs for the U.S. Treasury, a weaker dollar, and a loss of confidence in the U.S. government’s ability to manage its finances.
None of these outcomes are desirable for investors.
If you have any inquiries or wish to discuss any concerns, please don’t hesitate to contact us.
The content is developed from sources believed to be providing accurate information. The information in this material is not intended as tax or legal advice. It may not be used for the purpose of avoiding any federal tax penalties. Please consult legal or tax professionals for specific information regarding your individual situation. The opinions expressed and material provided are for general information, and should not be considered a solicitation for the purchase or sale of any security.
