Economic Commentary

Economic Commentary

May 20, 2022

Reiterating our “no recession” call

What happened

Based on multiple surveys and investor polls, many Americans are convinced that a recession is afoot. More pointedly, many believe that the Federal Reserve (Fed) will cause a recession.  

Our take – Despite lower U.S. growth, we still don’t see a recession on the horizon

Our view is that demand remains solid, which should allow the U.S. economy to power through the rough patch (slide 3). Moreover, the most common recession flags are not currently signaling a higher probability of a recession in the next 12 months (slide 4). 

Inflation remains a headwind, which gouges real inflation-adjusted gross domestic product (GDP). In fact, nominal GDP growth estimates are rising, not falling (slide 5). Certainly, the Russia-Ukraine conflict has aggravated inflationary pressures. The biggest impact to the U.S. economy from this conflict has been energy prices, including gasoline. Importantly, less than 5% of consumer spending is on energy, though it disproportionately impacts low-income Americans (slide 6).

This has caused inflation to be more broadly based. Yet, while core inflation has run hotter than 2021, the pace appears to be stabilizing (slide 7).  

Demand remains solid from both consumers (slide 8) and businesses (slide 9). After being overly skewed towards goods for more than two years, consumer spending is normalizing and transitioning back to services (slide 10). Things like meals out, vacations, and medical procedures are quickly ramping higher. Additionally, business travel is recovering. Yes, that shift away from goods is impacting big box retailers.  

Additionally, there has been a hand off to wage and income growth, which – while it does also drive inflation – drives continued economic growth. In the past year, cash balances in the U.S. have increased by $1.2 trillion (slide 11), which has primarily come from higher wages and incomes. In addition to buffering the costs from higher energy prices, it will also propel further consumer spending. 

There are challenges to be sure. Our senior global macro strategist, Eylem Senyuz, has flagged the high likelihood of core members of the European Union falling into recession in 2022. However, it is important to remember that some of these same countries went in and out of recession in 2012, 2014, and 2018. Yet, the U.S. economy continued to expand from 2009 through 2020 until it was upended by the pandemic lockdowns. We think this same scenario of weaker European, but resilient U.S. growth will repeat.

Additionally, with the onset of higher mortgage costs, housing activity has cooled recently. However, we expect housing activity to reaccelerate over the summer given a decade-plus of underbuilding and continued tight inventory. 

Alas, higher inflation has choked U.S. consumer and business sentiment. Meanwhile, the mid-term elections and issues before the Supreme Court are further stirring sour sentiment and discontent on both sides. 

To read the publication in its entirety, select "Download PDF," below.

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