Maybe, just maybe, the U.S. can avoid the recession that for some time now has been just six months away. Gross domestic product rose 1.1% in the first quarter, a cooling from previously, but certainly not in negative turf. Could be the nation will indeed have the “soft landing” that economic optimists have hoped for. Such a development would mean no cruel job losses and no stock market dive.
The stock market’s 2022 downturn—the S&P 500 lost 19.5%—had a lot to do with expectations for a recession that never arrived. A lot of folks nevertheless believe that a recession is coming. Like Michael Gapen, U.S. economist at Bank of America
BAC
A lot of pessimistic commentary refers to the ebbing of the inventory buildup, to replace shortages the pandemic produced. Mission accomplished, but that tailwind has now wafted away.
The bearish view is not predominant, though. Notice how the market has stayed in a trading range in April, seemingly uncertain about what the future will bring. Still, it is ahead 8.6% for the year, which constitutes a moderately sanguine outlook for the road ahead.
Arriving at this point is not without ups and downs. Stocks slid in early March, amid concerns about the stability of regional banks after the failures of Silicon Valley Bank and Signature Bank. Then the market rallied as it appeared certain Washington would not let lenders tank. So now we’re in a period of statis. What the Federal Reserve chooses to do about interest rates at its meeting next week could bring on new movement, whether higher or lower.
In the end, though, the market depends on the economy, and on corporate earnings that it feeds. Right now, there is ample evidence of a slowdown. GDP growth decelerated to a 1.1% growth rate in the first quarter. Consumer and business surveys have been downbeat. Jobless claims have risen. The Fed is expected to hike its benchmark rate by another quarter percentage point next week, as inflation stays stubbornly high, although down from its worst showing last year.
But here are some indications of economic health that may dispel predictions of recession. Fed officials don’t see negative results for the economy. In their summary of economic projections from the board, their median forecast for GDP growth shows nothing with a minus sign: The median increase at year-end is 0.4%. That’s hardly inspiring but not a recessionary mire. After that, they see modest growth of 1.2% in 2024 an 1.9% in 2025.
While earnings at S&P 500 companies have slipped, down 3.7% year over year for the first quarter thus far as profit reports roll in, that marks an improvement over the week before, which was off 6.3%. Many companies that have reported this past week demonstrated a knack for profitability. Analysts surveyed by FactSet expect earnings to return to positive territory in 2023’s second half: rising 1.7% in the third quarter and 8.8% in the fourth.
What could boost the economy? The Fed’s wrapping up its tightening campaign, which appears likely. A new surge in tech capital spending, courtesy of new innovations like artificial intelligence. The continued impact of high savings and wage increases.
With luck, it well may culminate in that much-hopes-for soft landing.
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