News in Charts: US gets 2023 off to a flying start

Strong January data mean the central scenario from Fathom’s Global Outlook, Winter 2022, which saw the US economy enter recession in Q1 of this year, now appears unlikely. In light of the overwhelming historical precedent, we are not yet ready to rule out a US recession entirely. Nevertheless, in our upcoming Global Outlook, Spring 2023, we are likely to push back the point at which the US enters recession, if it does at all, and reduce the weight we attach to those scenarios where it does. So why has Fathom’s view changed?

On 3 February we learned that the US economy added 517,000 jobs in January, a figure far in excess of the Reuters Poll consensus of 185,000. That was not a one-off surprise. Just as economists were systematically surprised by the persistence of inflation through late 2021 and into early 2022, more recently they have repeatedly been surprised by the resilience of the US labour market, with the change in non-farm payrolls averaging some 100,000 more than expected in each of the past twelve months.

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On the same day, it emerged that the ISM survey of non-manufacturers composite index had rebounded sharply in January from a surprisingly weak December reading. Not only was the US not in recession but it had got off to a flying start in 2023.

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Back in June we described two conditions that we felt would be necessary for the US to avoid recession, in the face of falling real incomes and rising interest rates. First, US households would need to spend at least a portion of their pandemic savings. Second, inflation expectations would need to revert quickly to target. Should that not happen, we said, it was likely that material upward pressure on wages would lead to large second-round effects from the initial price spikes, requiring a much larger monetary policy response.

Both these conditions have been met.  Our estimate of the pandemic savings pots of US households began to fall in January 2022, as CPI inflation moved ahead of wage growth, and the household savings ratio dropped sharply below its pre-pandemic average of 7.6%. Fast forward to January 2023, and pandemic savings pots have been reduced by around a third, suggesting that US households could continue to dip into their reserves at the current pace for a further two years.

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With respect to inflation, a glance beyond the headline numbers reveals that not only have wage and price inflation been falling back towards target but that real wages are now rising.

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In more good news, the Atlanta Fed’s decomposition of CPI inflation into the so-called ‘sticky-price’ and ‘flexible-price’ components, shows that both components are falling. Prices that are changed less frequently are more likely to reflect company expectations about future inflation, capturing the second-round effects of the larger, flexible price changes.

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In other words, the US economy is so far evolving precisely as we said it must if a recession were to be avoided. Those two conditions were necessary; however, they may not be sufficient to ensure continued expansion. What we continue to find troubling is the scale of the historical precedent. The US has never avoided recession with consumer confidence as low as it has been in recent months. It has once avoided recession with inflation as high as it has been in recent months, but that was as long ago as 1952. In our upcoming Global Outlook, Spring 2023 it is likely that we will push back the point at which the US enters recession in those scenarios where it does, and reduce the weight that we attach to those scenarios. But we are unlikely to rule out the prospect entirely. Key charts from our next forecast will be available to all Refinitiv users through Chartbook from mid-March.

The views expressed in this article are the views of the author, not necessarily those of Refinitiv Lipper or LSEG.

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