Surprise! We are Not in Recession

In March 1933, in the depths of the Great Depression, President Roosevelt attempted to inspire hope in saying “the only thing we have to fear is fear itself.” Today’s Government is suffering from a similar loss of confidence, despite an artificially stimulated economy at full employment. It doesn’t matter how many times our President defends his promulgation of alternate facts to tell us we should be happy, surveys continue to show extreme concern over inflation, high interest rates and the incessant forecast of a recession that is “waiting for Godot”.

The Fed’s anti-stimulus tightening last year has been countered by Biden’s continued inflationary Fiscal handouts. To the surprise of forecasters who have underestimated Government largesse, the initial economic slowdown in 2022 has modestly reaccelerated, moving further and further from the over anticipated hard landing recession. Our outlook has been for economic cycle lows to arrive in the 1st half of 2024, but without the classic unemployment spike. As seen here, the economic data has rebounded to the best levels since 2021. 


Pent up demand for travel post-Covid and excess stimulus cash have manifested in fantastic forecasts for all modes of travel and leisure this year.

 Delta Airlines CEO Ed Bastian said the company’s second-quarter 2023 earnings could be its highest ever for Q2 comparisons.  The airline industry expects the 2023 global passenger numbers to surpass pre-Covid levels as international travel finally makes a strong rebound. The airline related labor force is surging back to 2003 levels after years of decline. With severe shortages of schedulers, federal air traffic controllers, pilots and attendants, there are no signs of economic slowing from the travel sector.

One needs to look no further than the stock price of airlines that are on their way back toward multi-year highs to measure growing optimism. The industry is ordering planes again with over 12,000 passenger jets in the backlog at Boeing and Airbus that will take until the end of the decade to deliver. 

Cruise industry occupancy rates are back to strong pre-Covid levels. Royal Caribbean expects record bookings in 2023. The ocean leisure industry is operating at even more full capacity than the airlines. Royal Carribean (RCL) is at 102% occupancy rate, Norwegian is 101.5% and Carnival Cruise is at 91%. [*more than 2 in a 2-bedroom suite is >100%]. RCL stock has rallied strongly back to 2-year highs and is within easy reach of its all-time peak.

Some Bears who diligently searched for a sign of travel fatigue have noted the decline in RV sales the past 2 years. Their negativity has some merit but lacks context as RV sales were at unsustainable record levels for 2 years prior to 2023. If shipments come in as forecast above 400,000 and unemployment stays subdued when the economy bottoms next year, then RV sales may begin to turn back up with the next expansion cycle by the end of 2024.

The automotive industry employs 2.5 million with unit sales just under 14 million, yet production shortages persist, and inventory levels remain near record lows. Dealers need to restock significantly before any sales slowdown negatively impacts this sector.

In the past we have covered the strong housing sector that has defied 20-year high mortgage rates that Bears incorrectly assumed would collapse extremely inflated prices. While the homebuilders index continues to surprise to the upside, it is just as surprising how resilient the manufacturing and construction sectors have been. These areas contribute almost $8 trillion to our economy. Industrial stock prices are now testing record highs, indicative of an ongoing expansion, not an impending recession as most economists believe. 

In the construction sector the labor growth has been persistently reaching new record levels as residential and non-residential building appear strong.

We expect Constuction Spending to start rolling over before year end due to project financing lag time, but for now the trend of record expenditures exhibits no sign of slowing.

Another area pessimists falsely assume is in deep trouble is Durable Goods. It’s true that there has been a shift over the past year from shopping from our laptops to an experiential economy. This change has filled restaurants, hotels and airplanes to capacity. However, any slowing of demand for durables still has a healthy backlog that is witnessing surprising new record high order flows. While economic downturns can arrive suddenly, we normally see durable orders move sharply lower before a recession arrives.

Today’s job numbers highlight the conundrum for money managers and economists. After a year of deeply inverted yield curves, the deepest annual contraction of the money supply (M2) ever and surveys that indicate 8 months in a row of manufacturing contraction, this consumption led economy appears to remain defiantly robust. These negative proxies historically coincide with an economy near the end of a deep recession. However, the US economy is actually accelerating modestly to the upside as the ADP labor report today echoes. A whopping 97,000 construction jobs were added in June. The service sector jobs report today was stellar, adding almost 400,000 jobs with well over half coming from the small to medium sized companies in the leisure and hospitality segment. Additionally, sticky service sector inflation fell while spending surged. This good news for the economy also supports higher interest rates for longer. Eventually this mantra will pull down stocks and corporate forward earnings estimates. Anticipation of peak earnings and further rate hikes have capped the stock market rally for the past few weeks. With so many expecting another strong seasonal surge this July, we would use this period to fade the rally ahead of the seasonally weak period between September and November.  Note the strong correlation of stock indices with the Presidential seasonal cycle below. According to this pattern, stocks will become more susceptible to corrections and grudging gains over the next 12 months. 



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