In yesterday’s post we discussed how the Leading Economic Index is pointing to a mild recession later in 2023 or early 2024 but that the current economy looks sound. In their weekly market recap this week, JP Morgan, one the Portfolio Strategists we utilize for client accounts, wrote the following about the current economy…
Most forecasters entered this year expecting a recession, but recently, economic growth has actually reaccelerated. In fact, the Atlanta Fed GDPNow model estimates that the U.S. economy will grow at a 5.8% this quarter. If realized, this would mark the fifth consecutive quarter of at or above-trend growth, highlighting the resiliency of this economy despite tighter monetary policy. The current estimate increased from 4.1% last week, driven by upside surprises on retail sales, housing starts and industrial production this week.
Retail sales handily beat expectations, gaining 0.7% month to month and 1.0% ex-autos. While a 1.9% month to month increase in online sales contributed the most, gains were broad-based. Elsewhere, industrial production jumped by a stronger-than expected 1.0% month to month due to strong auto production and sweltering temperatures driving up the demand for cooling. Manufacturing output also rose 0.5% month to month . However, excluding the sharp increase in motor vehicles and parts production, gains were a more modest 0.1%. Finally, the housing market showed continued signs of stabilization. Housing starts and permits rose by 3.9% and 0.1%, respectively, as gains in single-family more than offset declines in multi-family across both measures.
Importantly, 5.8% growth is not guaranteed. Since the second quarter of 2014 and excluding the onset of COVID, the GDPNow model has overestimated the final GDP print by an average of 0.8% at this point in previous quarters, and by 2.2% when the model was above 4%. Still, strong economic momentum suggests the U.S. should avoid a recession in 2023 and has helped push yields higher. However, risks remain for 2024 and unless robust growth can be sustained, yields may be near their peak. With the 10-year at 15-year highs, investors can add to duration and lock in attractive income, leaving them better positioned for when yields inevitably move lower.
