If rising layoffs and weakening consumption are going to snowball into a US recession at some point, my interpretation is that the mass of macroeconomic ice crystals is still only about the size of a marble.
Just two weeks after a modest rise in unemployment sent markets into a tizzy, new data Thursday suggested that it was all a significant overreaction. Initial applications for US unemployment benefits fell for a second straight week; a report showed that retail sales accelerated in July by the most since January 2023; and Walmart Inc. said that comparable sales in the US, excluding fuel, jumped 4.2% in the most recent quarter.
The early stages of a recession are commonly described as environments in which weak consumer spending begets layoffs, which beget even weaker household expenditures and so forth. Fortunately, the evidence suggests that neither consumption nor the labor market is currently weakening at a particularly alarming pace. They’re both a bit weaker than they were, but it doesn’t feel like the momentum is getting away from us. To return to my wintry metaphor on a sultry August Thursday, the recession-risk “marble” could yet become a snowball and then an avalanche. But at this point, that feels like it would take a lot of time, as well as some significant policy mistakes from our monetary policy stewards at the Federal Reserve.
Retail sales increased 1% in July, but — to be clear — the finer details of the report didn’t exactly suggest an economy that’s going gangbusters. Motor vehicle and parts dealers accounted for most of the increase, yet auto dealers are achieving that with fast-increasing incentives. According to a report from Cox Automotive, average incentives were up 59.1% in July from a year earlier and now sit at the highest in over three years.
As Bloomberg Economics’ Estelle Ou and Eliza Winger point out, the next biggest retail sales contribution came from food and beverage stores, which are associated with “must have” consumption rather than unbridled optimism. That also may explain the strong Walmart earnings Thursday, since Walmart generates about 60% of its sales from food, personal care and household essentials, as my Bloomberg Opinion colleague Andrea Felsted explained to me. She says that value for money is in Walmart’s DNA, and this is becoming increasingly important to shoppers. The retailer is also winning more upper-income households. If they are feeling the pinch, that probably isn’t great news for the broader economy.
Online sales rose just 0.2%, but they were partially affected by July’s seasonal adjustment factor. Famously, Amazon.com Inc. often juices the July numbers with its Prime Day event, but it may have eaten into some of that revenue this year with another promotional event in March.
None of this adds up to a wildly optimistic picture for the US economy, but it sure doesn’t add up to a wildly negative one either. The US economy is doing fine. It could get thrown off track by some unforeseeable market “accident” or external shock, sure, but that’s pretty much always the case.
Two weeks ago, I admit that I too got a bit worked up about the increase in the unemployment rate. At 4.3%, it’s climbed a significant distance from a low of 3.4% in early 2023, and I still think it would be foolhardy to disregard that detail altogether. I also got concerned when stocks and other risk markets started to buckle, because to some degree, the incredible wealth creation in stocks and housing over recent years is also itself a part of the strong consumer story.
But the S&P 500 Index has now recovered all of its post-employment report losses. And a significant chunk of the increase in unemployment has come from new labor force entrants and reentrants who haven’t immediately found work, while another part reflected temporary layoffs — details that argue against the vicious cycle theory of deteriorating consumption and rising unemployment. Since then, the weekly jobless claims data has provided little further cause for concern.
The real question is whether the Fed will take proactive steps to make sure the economy stays buoyant — and I suspect they will. A consumer price index report from Wednesday provided further evidence that the inflation genie is mostly back in its bottle, and that it’s no longer necessary for policymakers to push their luck by keeping policy rates at a two-decade high. As long as the Fed starts that process of policy rate normalization soon, there’s little reason for unemployment to get out of control at this point — and for the recessionary marble in the US economy to become an avalanche.
A message from Advisor Perspectives and VettaFi: To learn more about this and other topics, check out our videos.
Bloomberg News provided this article. For more articles like this please visit
bloomberg.com.
Read more articles by Jonathan Levin
