A Sigh of Relief
The United States government finally reached an agreement to raise the debt ceiling. The government can still pay its bills, and it made people feel more confident about the future. This contributed to the rise in the stock market, and many indices reached their highest level in 2023. A robust federal employment report also contributed to the rally.
The Irrepressible Labor Market
Last week’s employment data showed that the labor market remains stout after over a year of sharp interest rate hikes.
The report exceeded market expectations in the growth of new jobs while reflecting a deceleration in wage growth. However, the strong job market could make some inflation components to stay elevated.
The stickier inflation could mean that the government may not want to lower interest rates this year.
Recession Indicators Worsen
The recession indicators continue to show slow, steady deterioration. The general picture continues to be one of a slow-growth economy inching towards but not yet definitively in a recession.
From our perspective, the threat of a "rocky landing" persists. Slow growth continues with recession risk elevated. Still, we have not seen a sufficiently dramatic break in certain indicators to indicate that the economy is definitively in contraction.
We continue to watch credit conditions, particularly the availability of credit from small banks to small businesses. To that end, we will pay close attention to deposit flows in the wake of the debt ceiling deal. As always, we will continue to update you with our thinking as events unfold.
Below is a snapshot of a recession indicator dashboard. Red indicates that the particular metric exceeds average recession range. Tan indicates that the particular metric is within recession range.
One useful economic metric to watch is the amount of money flowing through our financial system. In general, economists use the term "M2" to describe the money supply. You can think of it like a thermometer. When thermometers go up it's hotter and when they go down it's cooler. Similarly, when M2 is up the economy is hotter and more money is flowing and when M2 is down the economy is cooler and less money is flowing. This can make it more challenging to borrow money and can cause the economy to slow down.
Recently the M2 "thermometer" has taken a substantial decline and has experienced negative growth when compared to last year. We have not seen this occur since 1958. All other negative growth periods have occured during a depression or at least a recession. For the consumer and the economy as a whole, this may be a troubling sign.
Source: FRED, United States Census Bureau, as of 1/1/1900 – 3/31/2023