Why the Economy Might Experience a ‘Rolling Recession’

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The anticipated recession of 2023 has yet to materialize, and recent economic data indicate more signs of strength than weakness. In light of this, David Bailin, Chief Investment Officer at Citi Global Wealth Investments, has coined the term “rolling recession” to describe the current state of the US economy, where Certain sectors are experiencing decline while others, such as travel and leisure, remain strong.

Bailin explains that commercial real estate and some segments of basic consumer manufacturing are currently in recession, representing shrinking businesses in the United States. However, the overall economy continues to grow. Despite the S&P Global US manufacturing PMI index falling below expectations at 46.3 (with anything below 50 indicating contraction), other survey data suggests that: the economy is expanding.

The impact of interest rates is far-reaching. The Federal Reserve’s attempts to cool the economy through rapid interest rate hikes to manage inflation have faced challenges. Economists warn that the longer interest rates remain at their current level, the greater the likelihood of other sectors being affected. Bailin notes that smaller and medium-sized companies with capital needs are now at a disadvantage, which may constrain their growth, resulting in layoffs or even leading to business closures.

Although the labor market is slowing, it continues to add jobs. In May – 399,000 jobs were created, surpassing Wall Street estimates of 195,000. Unemployment in the US stands at 3.7%. Liz Ann Sonders, Chief Investment Strategist at Charles Schwab, believes that the full impact on the labor market is yet to come, and she suggests that companies’ cost structures, particularly labor, will provide crucial insights into the potential next phase of economic challenges.

Despite these concerns, some strategists remain cautious about labeling the current situation a recession in the near term until more significant cracks emerge. Goldman Sachs economists recently revised their judgmental probability of a US recession within the next 12 months to 25% (previously 35%). Jay Hatfield, CEO of Infrastructure Capital Management, points to the resilient residential housing sector as an indicator that it is premature to predict a recession, citing a shortage of homes for sale as a contributing factor.

Consumer spending also reflects signs of strength. May’s retail sales, not adjusted for inflation, increased by 0.3% month-over-month, defying expectations of a decline of 0.2%. Oren Klachkin, lead US economist at Oxford Economics, emphasizes the resilience of consumer spending in a recent note, stating that “the recession will be delayed as long as consumers continue to spend.”

For now, the Federal Reserve faces the challenge of maintaining a delicate balance. While the central bank has paused rate hikes, it has cautioned that one or two more increases may be implemented later this year to continue the fight against inflation without tipping the economy into recession.

VIX Long (Buy)
Enter At: 15.59
T.P_1: 18.03
T.P_2: 21.80
T.P_3: 24.23
T.P_4: 27.94
T.P_5: 29.29
T.P_6: 31.58
T.P_7: 35.01
T.P_8: 37.26
T.P_9: 38.96
S.L: 8.59

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