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U.S. Economy Appears Resilient As Headwinds Strengthen

By James PicernoMarket OverviewMar 25, 2022 01:55PM ET
www.investing.com/analysis/us-economy-appears-resilient-as-headwinds-strengthen-200620851
U.S. Economy Appears Resilient As Headwinds Strengthen
By James Picerno   |  Mar 25, 2022 01:55PM ET
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The blowback from the war in Ukraine has only just started to rock the global economy, but the early clues for the US remain encouraging. There’s a long road ahead and it’s too early to make high-confidence forecasts, but preliminary data for March suggest that growth still has the upper hand.

Let’s start with yesterday’s PMI survey data, which paints an upbeat profile for the US macro trend this month. The initial estimate of the US Composite Index, a survey-based GDP proxy, accelerated to an eight-month in March. The 58.5 print is well above the neutral 50 mark and signals a solid expansion trend.

S&P Global US PMI
S&P Global US PMI

“Manufacturers and service providers registered stronger upturns in activity, largely supported by pent-up demand the easing of Covid-19 restrictions,” Markit Economics reports. “Firms also noted that less severe supply disruption and job creation allowed firms to step up production.”

The latest weekly update on US jobless claims supports the upbeat PMI data. Indeed, new filings for unemployment benefits last week fell to the lowest level since 1969.

“US businesses are not laying off workers because they know the enormous challenges they’re facing in filling open positions,” says Ryan Sweet, a senior economist at Moody’s Analytics.

A research note from economists at Jefferies, an investment bank, advises that the labor market “is extremely strong and [jobless claims] data is exactly the sort of evidence that has given the Fed confidence that they can raise rates more quickly to battle inflation.” Overall, “demand for labor is strong and there are no reasons to believe that this will change any time soon, barring another wave of a new Covid variant.”

Despite these upbeat numbers, it’s premature to assume that the economy has dodged a business-cycle bullet. That assessment, or rejecting it, will take several months. Meanwhile, as CapitalSpectator.com outlined earlier this week, recession risk has risen recently, largely due to the confluence of surging inflation and various global shocks unleashed by the war in Ukraine.

But higher recession risk has yet to reach the tipping point. Although the potential for trouble has surely increased relative to a month ago, there’s still room for debate about what comes next. For now, using numbers published to date, shows a low probability that a new NBER-defined economic contraction has started, or is about to start in the immediate future. The challenge is that economic conditions are subject to radical and perhaps dramatic changes in the weeks ahead, due to the blowback from Russia’s invasion of Ukraine and elevated inflation.

An added factor of uncertainty, some economists advise, are changes in the forces of growth and contraction. “The long era of low inflation, suppressed volatility and easy financial conditions is ending,” says Mark Carney, a former head of the Bank of England. “It is being replaced by more challenging macro dynamics in which supply shocks are as important as demand shocks.”

Another complication is that the US economy is heading into a period of elevated macro risks with a decelerating growth rate. Some current nowcasts for first-quarter GDP activity anticipate a sharp slowdown in output that suggest economic activity will come to a virtual stop. The Atlanta Fed’s GDPNow model is projecting that Q1 GDP will increase by a tepid 0.9% in the first three months of 2022 (based on the Mar. 24 estimate) – a dramatic slowdown from Q4’s red-hot 7.0% surge (annualized rate).

GDP Estimates For 2022-Q1
GDP Estimates For 2022-Q1

But other nowcasting models suggest otherwise. Notably, Now-casting.com is currently estimating a much stronger US expansion north of 4.0% for upcoming Q1 numbers, based on the firm’s Mar. 25 analysis.

GDP Now-Cast Q1-2022
GDP Now-Cast Q1-2022

Nonetheless, with a global shock just starting to roil economies, along with the uncertainty of how the Ukraine war could evolve in the days and weeks ahead, a hefty dose of humility is required for assessing the path of US economic activity in the near term. So far, however, there are reasons to think that the current expansion will continue in some degree for the foreseeable future. The challenge is watching the incoming data and deciding how, or if, to change the cautiously optimistic outlook.

U.S. Economy Appears Resilient As Headwinds Strengthen
 

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U.S. Economy Appears Resilient As Headwinds Strengthen

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Comments (7)
Randall Paul
Randall Paul Mar 26, 2022 11:23AM ET
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letsreadtis in the 3rd quarter. don't want to hear anymore cheerleading.
taylor jason
taylor jason Mar 26, 2022 10:54AM ET
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it's to early to say how resilient the us economy really is. most companies have just overcome the covid supply chain disruption to get thrown into the Russian/ukraine crisis which has put substantial upward pressure on commodities. the longer commodities remain elevated the worse the impact on consumer consumption will be. considering the us economy is 70% consumption, even moderate decreases in spending will substantially lower growth. that coupled with a higher discount rate, translates to lower future free cash flows which should ultimately lower valuations. as you mentioned, the period of low inflation has ended, yet we have to see what that impact will be on price multiples. with no inflation sp500 trading at 30x earnings might not be bad, but with inflation that might lower the multiple investors are willing to pay especially in growth stocks. just my two cents...
Shep De
Shep De Mar 26, 2022 1:25AM ET
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Oil going a lot higher, 130-150 grind into summer and I think 180 by July 4 will happen too; this reality will overshadow macro data like PMI, Jobs, and don't forget crazy inflationary effects on goods already and we've a FED waited far too long to start QT. Inflation will force the. to keep raising month to month, min. 0.50% and could be 0.75% talk by next month FOMC meeting. CPI will be 9% min., with poss of much higher
Viren Patel
Viren Patel Mar 25, 2022 6:32PM ET
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New money haven is stock market and crypto... NOT gold or bonds... NO returns on them...
Peter ONeill
Peter ONeill Mar 25, 2022 6:32PM ET
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Crypto could fall back to pre covid levels tomorrow. Esp if Russia starts using it to get around sanctions for oil/gas sales - so the Fed increases legislation around. Plus the stock market is only just below all-time highs / a lot of stocks have PE Ratios 35%+ their long-term averages ....which will go only one way in a QT / No more stimulus / raising interest rate/supply bottleneck and high inflation environment. Am I investing in stocks now? Yes - but not in indexes / ETF as I think the market will fall by 35%-40% in the next 12-18 or so months. So investing more in individual long term stock picks I think are ok value as they are already back at pre covid levels (Block, PYPL, Teladoc, Netflix etc)
Sol Wein
Sol Wein Mar 25, 2022 6:08PM ET
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The stockMarket might be resilient but the economy is trash
Peter ONeill
Peter ONeill Mar 25, 2022 6:08PM ET
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The stock market isn't resilient. It just has trillions in fed printed cash floating around trying to find a home - which is one of the main reasons inflation is so bad. Fed can't save the economy and stock market at the same time with inflation so high / Ukraine situation impacting energy/food and the market already flooded with cheap cash. Either it increases rates and sells off its balance sheet to lower inflation to bearable levels - or it acts to keep the stock market artificially inflated by not being aggressive enough and you have a lost decade of stagflation and lo consumer sentiment similar to the 1970s.
Stephen Fa
Stephen Fa Mar 25, 2022 3:02PM ET
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Hyper inflation about to temper this optimism.
Nick Leeds
Nick Leeds Mar 25, 2022 10:37AM ET
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yes we have 3.8 % unemployment, cities like NYC are coming back strong, restaurants and stores are still packed....
Peter ONeill
Peter ONeill Mar 25, 2022 10:37AM ET
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Yes plus $30.5 TRILLION in national debt, $11 Trillion in Corporate Debt and inflation heading for 10%+ with consumer sentiment starting to collapse ....Fed let the economy way overeat with printing presses, and now impossible to see anything but a hard landing as prices increase and labor gets tighter. If history is anything to go by almost identical conditions to 1969 and 2001...both which lead to a 40% fall in stockmarkets within 12 months. Plus if the economy does start to falter not much Fed can do without making Inflation situation worse...
taylor jason
taylor jason Mar 25, 2022 10:37AM ET
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rofl you can't even take the subway in nyc right now
 
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