Thinking of serving: how (not) seeing a recession

How (not) find a recession

What is the probability of the recession? This is a question that we often ask, which is really ironic, given that we are famous economists … not too good at predicting recession. The thing about “predicting nine from the last five” might be generous.

So it might surprise you that I will not predict the tenth. Recession is not the basic case of our team on both sides of Atlantic, even though I think we will admit it is not a high registration call.

Many, not surprising, depending on whether Chinese tariffs are rolled back over the next few weeks, and more importantly, how much. Reducing the tariff to 50-60% of 145% of the current wanderer, as has been mentioned in the media, may not really change a lot of images. The majority of Chinese imports will still look not economical, and American companies will still be given great incentives to find a replacement from other places, with all complexity of supply chains that carry. Lynn Song has a good explanation here.

Enough to say, whatever happens, the impact will still be quite large. Hoping to see the evidence in the data calendar which is packaged next week. But be careful! That also means many opportunities to find a recession where not one.

Take manufacturing. The ISM survey next week will function as a reminder of a dangerous situation that is now found in the sector. This does not look great since immediately after Covid. And at that time, when the manufacturing survey began to fall, talking about recessions began to increase quickly. But the economy is powerful. It is a reminder that manufacturing is not the dominant economic power in the US as before.

Pandemic comparison may seem very relevant now, considering all the talk about the rack -prak empty and supplying traffic jams today. But that is not a perfect analogy. Most importantly, it is an economy driven by the Pandemic era stimulus, and a demand that is never satisfied with the accompanying services, both of which have long been lost. With savings and confidence and delinquency, consumers are less positioned well to absorb the cost of supply chain disorders this time.

If we are honest, most of them are correct for a while, and we have all learned in a difficult way that you underestimate US consumers with your risks.

If the last few years have taught us something, it is an insensitive household of a higher level as before. Or at least, as is often reminded by James Knightley, even if low -income households are squeezed, the top 20% have a lot of firing power to continue to grow.

More than that, the increase in the mega level that we saw in 2022 was basically a large -magnitude stress test on the main economy. And with the possibility of exceptions to small banks, this system comes out relatively without injury. I discussed this because the recession was often driven by what economists like to call it “imbalance”. Not sustainable debt bags, in other words, and generally not the problem today. Household and company balance sheet looks good.

As for next week, there is a more basic problem to compete, that is, everything is leaning with frontloading. Everything ranging from imports to retail has been influenced by households and businesses that try to enter more than tariffs. And considering that many are distributed to imports, James Knightley considers the first quarter growth, because next week, it will not erode above zero.

So, if GDP, or manufacturing, or loan delinquency, there is no reliable recession metric at this time, what is that? The answer is probably the job market. However, recessions often begin and end with a shift in unemployment.

Even here, there is room to be misled. March saw a worrying surge in the announcement of layoffs, which was highly concentrated in government. And maybe we will see more in April data next week than Challenger.

But that is somewhat like the previous manufacturing point – is what happened in the public sector entirely abstract from the private sector? Possible. Of course, unemployment claims data, which does not include the government, does not show something that is very worrying.

Maybe it is the point debated if the tariff starts to put serious pressure on employing other places. And it looks very possible. James K considers we must supervise transportation/logistics for a little stress, now after the frontloading is complete and the delivery slows down.

Maybe then, the true sign that we recession is if we start getting a negative payroll reading. That is not our position, although James expects more work numbers to be muted next week. With this assumption coming consistently weaker when we go to summer, then it is likely to be a catalyst for Fed to start cutting interest rates again. Increasing unemployment is what ultimately triggered a 50 base-base interest rate last September.

It might sound like music in the ear of the equity market. It happened last year, given that the increase in unemployment that we saw last summer was eventually proven to be a fake alarm. But I don’t feel too convincing. Recruitment is about indicators that look backward as you found, as well as numbers that suddenly become much weaker, there is a clear risk from Fed to find himself behind the curve. Specifically, if inflation is increasing quickly holding it from the desired easing policy.

As I said at the beginning, it was not a place we thought we would end. But it is a reminder that for all fake signals that we must face, the reality is, we often don’t know we are in the recession until it’s too late.

Happy weekend everyone!

Think in the future in the advanced market
United States (James Knightley)

Sentiment (cell): This will be a very large week for US data, which is likely to intensify the concern of recession in the coming months. The size of the consumer sentiment conference council will fall sharply if the size of the University of Michigan is something to do. Households are worried about extortion to spend the power increases induced by tariffs, while fear of unemployment and potential cutting to the rights of the government is to trigger concerns about income. Gathering that with a decrease in bond prices and equity, and a decrease in wealth is another factor that makes the household more nervous and more reluctant to spend.
GDP (Wed): The result will be a very weak GDP 1Q report on Wednesday. We cannot rule out contractions because of the surge in imports in the first three months of this year, because the company submitted a foreign purchase to get the feared tariff. However, consumer expenditure in March and investment may only be enough to maintain growth in positive areas for now. That might not happen in the future.
Labor Market (Friday): Then on Friday we have a very important April job report. Hiring slowed down because of uncertainty over economic views, but so far, slight and rare shooting. Nevertheless, this will be translated into slower payroll growth with the risk of other small increases in the unemployment rate because the labor supply exceeds the growth of labor demand.
Canada (James Knightley)

The election of Canada has been changed thanks to Donald Trump’s comments on making Canada State of the 51st US. Support for the opposition conservative party has collapsed while the Liberal Party has been revived by changes in leadership under Mark Carney, former Governor of Bank Canada and Bank British. Anyone who wins faces the challenges of dealing with the economic fall of the trade war, where three quarters of Canadian exports go to the US.
Think in the future for Central and Eastern European
Poland (Adam Antoniak)

Flash CPI (Wed): We estimate that in April, headline inflation was moderated under 4.5% years-year-year from 4.9% yoy in March due to a higher reference base in April 2024 when VAT on food was restored. Core inflation is also likely to be further moderated. Along with a decrease in wage growth and weaker economic activities in 1Q25, this must convince the Monetary Policy Council (MPC) to cut the policy level of the National Poland National Bank (NBP) in May, potentially even by 50BP.
PMI Manufacturing (FRI): Purchasing managers may reduce their assessment of business conditions in the field of manufacturing, but we hope that the main index is still above 50PTS., Refers to slowing down the improvement of the domestic industry, despite external headwinds (low activities in Germany, uncertainty related to future rates).
Hungary (Frantisek Taborsky)

NBH Meeting (Tue): On Tuesday, we will see the first meeting of the National Bank of Hungary (NBH) since the “April” Liberation Day “April and March Inflation, which saw the first decline in the headline level this year. Although many have happened since the March meeting, nothing might change for NBH in terms of advanced guidance, and tariffs tend not to change at 6.50%.
Hungarian economy has shifted in a Dovish direction since the NBH March meeting, driven by lower inflation, government steps, and increasing the risk of decline to fragile economic views. However, we believe this is still too early for every reversal in the future guide. The governor has reiterated that his focus is on domestic inflation and warns the impact of inflation from US tariffs, clearly indicates that cutting the rate outside the table. But at least for now, we believe that the possibility of an increase in interest rates can fade from the discussion given some stabilization in the front of the domestic and reduce the volatility of FX. We continue to see the unchanged level this year and have the first rate reduction in our estimates for March next year.
Czech Republic (David Havrlant)

GDP (WED): The first taking this year about the overall economic performance will show a sustainable economic expansion at a strong speed. While detailed GDP details will not exist, we see strong household expenses and hope for some rebounds in the suppressed investment activity. The economy has a good start for this year, while the new reshuffle is from the constellations of global trade and underestimated beliefs about the prospects of global growth can act as obstacles in the next place.
PMI (Friday): The same factor will drag down the PMI Manufacturing in April, solving the trend of the increase. Meanwhile, the fog surrounding the impact of global trade negotiations, including how the EU can protect itself from export disposal, making an industrial base more careful and can result in postponed investment.
Source: Ing