In recent months, much ink has been spilled, and airtime consumed, on talk of an imminent recession in the U.S. However, different sides tell different stories. Case in point: Although the U.S. manufacturing sector, approximately 10% of the country’s GDP, has faced stronger headwinds over the last year-plus (mainly because of ongoing trade uncertainty with China), consumer spending, roughly 70% of GDP, has held up pretty well.
In an ocean of often contradictory data and indicators, knowing which floating bottle contains the right message regarding U.S. economic trends can be difficult. The stock market, often viewed as the leading indicator of broader economic trends, can be a useful metric, but short-term market volatility can distort the true picture, calling to mind Nobel Prize-winning economist Paul Samuelson’s 1966 remark, “The stock market has predicted nine of the last five recessions.”
Credit markets provide their own leading indicators that currently paint a relatively rosy portrait of the U.S. economy. For example, as reported by Hale Stewart of Seeking Alpha, the left-hand chart below shows that, after steadily climbing since late 2017, BBB-rated corporate-bond yields have steadily declined since early 2019 and are sitting near multi-year lows. A rise in yields of such higher-risk bonds generally suggests credit stress in the economy, so this clear sign that credit stress is well contained for higher-risk corporations indicates rather favorable economic conditions.
Shown in the chart below on the right, the current growth rate of the money supply, managed by the Federal Reserve, is another encouraging economic gauge. A slowdown in growth of the money supply points to tightening liquidity in the financial system, which can drag overall economic growth down. On the other hand, the reverse is true when money supply growth accelerates, as it clearly has this year after a steady two-year drop.
Whether these two charts mean that, after slower growth over the last 12-18 months, the U.S. is sure to avoid a recession or actually on the cusp of faster growth is far from certain. Indeed, Yun Li of CNBC observed in July that, although the current expansion entered its 11th year this summer and is now the longest on record since 1854, it is also the most relatively modest expansion in the post-WWII era. Nonetheless, fears of a recession may well be premature and overblown. The U.S. economy will inevitably move into a contractionary cycle at some point, but recent data suggest that that is at least a year off.