Could America’s economy escape recession? The Economist. The stock market seems to believe that right now with it's spring/summer run up on the back of the promise of AI. It also seems a decent bet that Biden will do what he can to keep things running through the upcoming election cycle. And perhaps the economy can continue to run well through the end of next year, as there is often a long lag between financial tightening and the real economy impacts, especially after the huge cash injections during the pandemic
Trucking is often a leading indicator of the economy. After a strong few years partly helped by high pricing, the last year has been more difficult. Often individual firms have their own idiosyncrasies, but the bankruptcy of Yellow does seem notable.
Trucking Firm That Got $700 Million U.S. Bailout Declares Bankruptcy. A pandemic-era lifeline that the Trump administration predicted would turn a profit for the federal government failed to keep Yellow afloat.
That was one example of the huge response to the pandemic, as federal outlays and money supply both surged with fed funds at zero, ongoing QE, and a positive yield curve.
In response, inflation surged. The Fed has acted (perhaps too slowly for some), with an unprecedented tightening cycle of hikes in fed funds and QT. The yield curve has inverted, and M2 supply is contracting. Consumer credit card rates are up to 21%, and mortgage rates are more than 7%. History tells us that monetary tightening can take 18 months to impact, and in the meantime, the economy and the S&P are holding in well.
But, pressure is put on the economic chain, and weak links break. Yellow is an example. Recently, Moody’s downgraded smaller regional banks.
As tightening pressure builds, nominal GDP is slowing, both prices and volumes. ZipRecruiter reported that “employers’ willingness to pay has been declining significantly.” Indeed’s Wage Tracker has already slowed from over +9% y/y to less than +5%.
S&P earnings have been contracting, probably down -5% y/y in 2Q. Nominal growth remained quite healthy in Q2. The stock market is betting that nominal growth holds, such that earnings start growing again.
Just as the stock market thinks we have achieved that soft landing, it would make sense that the next few quarters bring the shock that financial tightening typically brings.
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