Hold That Recession: U.S. Indicators Are Trouncing Forecasts
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The U.S. economy is outperforming expectations by the most this year, offering a fresh rebuttal to last month’s resurgent recession fears fueled by the trade war and a manufacturing slump.
The Bloomberg Economic Surprise Index has reached an 11-month high after four indicators released Thursday, including existing home sales and jobless claims, each surpassed expectations. The gauge continued to advance after swinging to positive from negative on Tuesday for the first time this year. The data also pushed a similar measure produced by Citigroup Inc. to the highest level since April 2018.
“It says things are getting better,” said Jim Paulsen, chief investment strategist at Leuthold Group in Minneapolis “There’s a definitive change in the growth profile and there’s an acceleration in growth. It’s interesting how pessimistic the attitudes still are among investors, yet when you look at surprise indexes, you would think people would feel better about growth. There’s a disconnect.”
The readings are signaling a somewhat brighter mood about the world’s largest economy after some indicators and markets stoked fears last month of a quicker ending to the record-long economic expansion.
Federal Reserve policy makers on Wednesday highlighted the economy’s strength even as they moved forward with their second-straight interest-rate reduction to guard against elevated risks to the expansion. Investors are growing more upbeat too, lifting U.S. equity benchmarks back near records this month.
Paulsen also noted similar surprise upbeat readings in other parts of the world, including Europe and Japan.
St. Louis Fed President James Bullard, asked Friday about rising surprise indexes, pointed to mixed readings and diverging sectors.
“We have a very strong labor market that’s underpinning good consumption growth in the U.S., the household sector is generally doing well,” he told Wharton Business Radio on Sirius XM. He said other parts of the economy are seeing weakness with global growth slowing and Europe “teetering on recession.”
Thursday’s raft of U.S. data included the Labor Department’s report on initial filings for unemployment benefits, which matched the most optimistic estimate in Bloomberg’s survey and were just above historically low levels.
Elsewhere, the unchanged reading on the Conference Board’s index of leading economic indicators -- a barometer of future growth -- compared with projections for a decline.
In addition, an industry report on August existing home sales sailed above all forecasts following a report Wednesday showing the strongest pace of housing starts since 2007, signaling that residential construction may add to economic growth in the third quarter for the first time since the end of 2017.
Within manufacturing, the Philadelphia Fed’s index of manufacturing business activity in September topped estimates Thursday as factories continued to expand at a moderate pace. On the other hand, the New York Fed’s Empire State factory index was more downbeat earlier this week.
To be sure, several better-than-forecast data points don’t amount to an all-clear sign for the economy. American business is still reluctant to ramp up capital investment against a backdrop of trade policy uncertainty and tepid global demand.
The chances of recession in the next 12 months are up to 35% from 20% at the end of last year, according to a Bloomberg survey of economists earlier this month. Forecasters still project 2.2% GDP growth this year and 1.7% in 2020.
Recession concerns grew last month after President Donald Trump announced more tariffs on Chinese goods, prompting a retaliation, while the stock market slumped and a key part of the Treasury yield curve inverted -- a traditional harbinger of recession.
“People got overly pessimistic about the U.S. economic outlook,” said Mark Vitner, senior economist with Wells Fargo & Co. Now, he says, “the message is growth is slower, yes, but the risk of recession is grossly overstated. As long as the Fed continues to do the right thing” by cutting rates a couple more times.
“A year from now we’ll look back and say, yes, we pivoted to slower growth and job growth slowed, but there is still a lot going right with the economy,” he said.
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