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- The US economy has too many green flags to slip into a recession, according to Fundstrat's Tom Lee.
- Lee suggested the economy would actually enter an expansion in 2023.
- He pointed to five positive economic indicators that suggest a better market is on the horizon.
The US economy is actually showing signs of entering an expansion, not a recession, according to Fundstrat's head of research Tom Lee.
Lee, who is one of the most bullish Wall Street commentators, pointed to a handful of positive indicators in the economy that suggest inflation is coming under the Fed's control and the US may not slip into a hard landing after all.
"I think that this year we essentially slip into an expansion," Lee said in a video sent to Fundstrat clients on Monday, pointing to five "green shoots" that are currently sending bullish signals on the US economy:
1. The job market is still strong.
The labor force has boomed over the past few years, with the number of civilian workers growing at an average pace of 1.9% a year since 2021, Lee said. That's up from the average 0.7% a year from 2010 to 2019.
Economists have said that the strong labor market has buoyed the US economy, despite the Fed's aggressive monetary tightening over the last year. While gains have slowed, the US added another 187,000 jobs in August, up from the revised 157,000 new jobs added in July, according to the Bureau of Labor Statistics.
2. Inflation expectations are dropping.
Consumer inflation expectations have plunged over the past few years – another positive indicator for the economy. One-year forward inflation expectations slumped to 3.6% in September, according to the New York Fed, down from the 6.8% recorded in June 2022.
Meanwhile, three-year forward inflation expectations dropped to 2.8% in September, down from 4.2% in October 2021. That's especially significant, as it means Americans are expecting inflation to decline over the long-run.
3. Rent prices are falling.
Shelter prices are the largest contributor of inflation in the economy, and rent prices have plunged from their 2021 peaks.
Apartment List's National Rent Index dropped to -1.2% in August, down from a nearly 20% increase in rent prices in late 2021. Meanwhile, the percentage of US states with rent declines rose to 45% in August, up from 0% in July of last year.
Declining shelter inflation could easily help inflation drop like a rock, Lee previously suggested.
4. Yellen is feeling better about the US economy.
Treasury Secretary Janet Yellen has turned more optimistic on the economy, suggesting last week that the US may be able to avoid a recession.
"The economy is fundamentally in good shape, and inflation is coming down if you measure it on a 12-month basis," she said in a briefing on Friday, though she acknowledged that there was "still work to do" to lower prices.
5. Stock market volatility has fallen.
The stock market's volatility gauge briefly slipped below 13 last week, nearing its lowest level since the start of 2023. That's a sign investors are feeling more confident, as volatility generally picks up when the economy flashes signs of weakness.
But investors have more economic data to digest, including the August inflation report on Wednesday, which will give guidance on whether the economy needs additional monetary tightening. The annual pace of consumer inflation is expected to have to accelerated to 3.6% from the 3.2% rate recorded in July.