Incoming data reveals that the recessionistas were again too early with their warnings in the waning days of 2018. Initial unemployment claims have leveled out:
New home sales have rebounded:
Manufacturing is keeping it together:
On the soft side though consumer spending looks weak:
Should we worry about consumer spending? I think it will slow this year relative to last, but I would not anticipate a sustained and substantial downturn absent a sharp deterioration of the job market. We get the employment numbers at the end of this week; the initial claims numbers have yet to give us much to worry about.
So are we out of the woods as far as a recession is concerned? For what it’s worth, the case of an imminent recession was never very strong and still isn’t despite the recent yield curve inversion. It is always forgotten that the yield curve is a very long leading indicator; an inversion might happen a year or even two ahead of a recession. Hence, what you should expect for some time after an inversion is that incoming data remains consistent with steady if not solid economic growth.
Nor does the inversion itself guarantee recession. My view is that the Fed still has time to prevent a recession even after an inversion (the worst risk is that the Fed keeps hiking after inversion) and the Fed has gone a long way toward holding the expansion together by shifting to a more dovish stance in recent months. I still believe, however, that they still need to be wary about a recession and be prepared to cut rates ahead of a downturn in the data – see my Bloomberg Opinion piece today. That takes something of a leap of faith on the part of policymakers, a leap of faith they are not always willing to take.
Bottom Line: Recession calls were again too early. The economy retains momentum into 2019 even if the pace of growth eases as expected. The Fed’s dovish shift should greatly increase the probability that the expansion continues. More easing may still be needed.