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Obviously, the most burning question about the U.S. economy right now and is making financial news headlines daily is whether the U.S. is currently in a recession or is headed for one in the not-so-distant future. The economy has slowed down considerably from the tremendous strength in 2021, which benefited from the pent-up demand created by the pandemic and monumental monetary intervention by central banks the world over. For the first time in nine months, inflation has been at 50-year highs, and there’s been an enormous amount of gloom in both the consumer and the investing world. Plus, evidence is growing that a recession is becoming more likely in 2023.

First, economic areas of strength:

1. Bank earnings released last month make it difficult to see any signs of an impending recession.  Credit card spending on travel and entertainment continues to grow healthily,  and less-affluent consumers are sitting on substantially higher savings than before the pandemic. Charge-offs also continue to decline, and signs of consumer stress are not evident yet.
2. The American consumer, which is approximately 70% of the U.S. economy, has been very resilient. According to a MasterCard analysis, retail sales were up 10% year-over-year in September 2022, and spending on travel and dining was up 20% from the same period last year (rebounding from COVID-depressed numbers).
3. Government spending is increasing.
4. Demand for commercial and personal loans has been growing.

Now, the areas of concern:

1. Housing was overbuilt in 2021, and home prices rose quickly as interest rates cratered.  Now, housing builds are down 23% from February to August, prices have begun to fall, and the trend appears to be getting worse. We expect this to weigh heavily on the housing market, which has major implications for the overall economy.
2. Automobile demand is being slammed by increasing material costs and higher interest rates are adding finance costs.
3. The Fed should continue to raise interest rates until inflation begins to fall substantially.

The global economy is on a solid foundation based on present activity, but it faces a sharp slowdown in growth, headwinds from a strong dollar, and generally tighter financial conditions. In fact, the two are related, and we anticipate that continued slower global growth and a strong DXY will cause the Fed to reduce its current levels of hawkish rhetoric.

Headlines from ~Q3

1. UK Gilt Crisis and Yield Curve Control
2. Nord Stream Pipeline Attack
3. Ukraine Conflict Escalation
4. EU & UK Natural Gas Crisis
5. Yen Intervention
6. Yuan Intervention
7. China elects Xi to unprecedented third term
8. Signing of the CHIPS and Science Act, a double-barreled bill that commits more than $50 billion in subsidies to U.S. chip manufacturers and bans the export of advanced chips or chip manufacturing equipment to China for 10 years. More damagingly, this legislation prohibits U.S. chip production equipment companies from sending employees to train and support Chinese chip manufacturers.