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- For months, markets and businesses have been bracing for a much-predicted US recession – which never showed up.
- And now, economists at UBS have compiled a list of 10 reasons why the downturn hasn't happened so far.
- Government spending, strong savings, and a resilient jobs market are among reasons the economy held up, the bank said.
Since late 2022, a majority of big Wall Street names have repeatedly predicted a recession to hit the US economy this year.
But more than six months into 2023, there's still no sign of the much-predicted output contraction. If anything, things are looking pretty upbeat – inflation is rapidly cooling, the job market is holding up, unemployment has hit rock bottom and stocks are ebullient.
Even a deeply inverted bond yield curve, considered a classic warning sign for an impending economic downturn, has had little damping effect on investor sentiment – baffling many in in markets and businesses that have been bracing for the event.
Economists at the Swiss banking giant UBS have compiled a list of 10 reasons why the recession failed to show up. Using the National Bureau of Economic Research's definition of the term, which tracks criteria such as consumption, production, and unemployment, the bank has produced a list of evidence that shows the US economy is much more resilient than many experts give credit for.
1. Monetary policy isn't all that tight yet
Even after the Federal Reserve lifted interest rates by a staggering 500 basis points over the past five quarters, inflation-adjusted borrowing costs in the US still very low. The yield on the 10-year Treasury Inflation-Indexed Security is currently just 1.52%.
The central bank's balance sheet, which is closely correlated with the amount of money it has pumped into the economy via asset purchases, is still 80% larger than pre-pandemic levels, according to UBS. That suggests monetary conditions are still not tight by historical standards.
"Financial conditions have eased in 2023, and the Fed's balance sheet and money supply are very accommodative vs. pre-pandemic trends," the Swiss bank said in a report.
2. Government spending is back on the rise
Government spending is on the rise again, after a pullback last year from the largesse of the pandemic days. And that's also increasing the amount of money available in the financial system, cushioning the economy.
The Inflation Reduction Act of 2022 has also helped stimulate investment, especially in the manufacturing sector, according to UBS.
3. Strong savings are fueling consumption
Savings accrued during the pandemic have acted as a buffer against the rising cost of living, supporting consumption in the US economy. Additionally, financial-asset price increases have boosted total wealth.
On the other hand, a majority of mortgages are locked into fixed rates - and that has protected those borrowers from the impact of the Fed's rate increases.
4. Debt levels aren't too high
" Consumer debt levels and delinquency rates are in much better shape compared to pre-financial crisis in 2008," the bank said in the note. " Household debt loads appear manageable. Credit card delinquencies are rising, but off a historically low base."
Companies aren't suffering from an investment overhang and high inflation has deflated high debt levels, according to UBS.
5. Credit conditions haven't tightened much
Credit-market conditions haven't turned unfavorable for corporate borrowers, even after the banking turmoil earlier this year prompted some banks to pull back on lending.
High-yield bond spreads are down year-to-date, according to UBS, meaning companies with lower credit ratings have easier access to public debt than twelve months ago. The issuance of such debt is on the rise, too.
6. Labor market remains robust
American employers are still adding a sizable number of new positions, pushing jobless claims in the economy below pre-pandemic averages.
" Payrolls are catching up to their pre-pandemic trend. Employment rates mostly near pre-pandemic levels," UBS said in the note.
7. Economic data trends are stabilizing
The pandemic disrupted cyclical patterns in economic data, but they are returning back to normal, according to the Swiss bank. And that's likely signaling that the economy is on a more stable footing.
" Spending on goods and services is getting back to normal. Job growth volatility has returned to pre-pandemic Levels," UBS said. " Supply bottlenecks are also easing, though not back to normal."
8. Sectoral downturns
Separate activity slumps in different parts of the economy may have helped prevent a full-blown recession to some extent, according to the bank.
Both US manufacturing and housing starts had slumped in 2022, but may be recovering now, UBS said.
9. Services growth remains solid
While manufacturing has seen some slowdown, its share of the economy is declining and the larger services sector has experienced sustained growth.
" Services consumption was slower to recover, but is still growing and it's a much bigger share of the economy," the bank said. " The manufacturing sector's share of the private sector continues to shrink."
10. The economy is less cyclical now
The US economy has evolved structurally in a way that it's less vulnerable now to cyclical ups and downs, UBS said.
"It's a knowledge-based services economy that has become less sensitive to inventory cycles and energy costs - and as a result, economic activity is less volatile and expansions can last longer," the bank said.