Recession is a keyword that has been mentioned most frequently by the market in recent times. After the U.S. economy shrank in the first quarter, how will it perform in the second quarter? For now, a number of newly released data seem to indicate that the performance of the U.S.

As early as the end of April, data released by the U.S. Department of Commerce showed that the initial value of the annualized quarterly rate of U.S. GDP in the first quarter (i.e., the first estimate) was -1.4%, which was far lower than the market consensus of 1.1% growth. It was the first negative growth since the second quarter of 2020. This result was beyond market expectations and failed to even meet Dow Jones 's lowest expectation of a slight 1% GDP growth in the first quarter. After GDP ended with a 6.9% increase in the fourth quarter of 2021, U.S. economic growth instantly fell off a cliff.

Specifically, the final value of U.S. GDP in the first quarter was revised down, mainly because consumer spending was revised downwards . Data showed that expenditure on goods and services (personal consumption expenditure) increased by 1.8% year-on-year, far lower than previous market expectations and the initial value of 3.1%. From a breakdown point of view, financial services, insurance and medical care expenditures declined, and goods expenditures were revised from almost no change to a year-on-year decrease of 0.3%. What you need to know is that consumer spending is the main engine of the U.S. economy, accounting for as much as 70% of economic activity.

In this regard, Mizuho Financial Group U.S. economist Alex Pelle said: "In this case, the revised final value of GDP changes people's view of the first quarter. Compared with the previous two quarters, the first quarter Instead of accelerating, consumption has slowed down. "

At the same time, the inflation price index in GDP in the first quarter rose to 8.2% year-on-year from 8.1% in the fourth quarter of last year, the highest level since June 1981. . Adjusted pre-tax corporate profits fell by 2.2% year-on-year in the first quarter, the first decline in more than a year, while the fourth quarter of 2021 increased by 0.7% year-on-year, showing the erosion of corporate profits caused by stubbornly high inflation. In the segmented fields, the adjusted pre-tax corporate profits of the private goods production industry fell by 6.9%, and the adjusted pre-tax corporate profits of the private service production industry fell by 0.8%.

In addition, private inventory investment was revised up sharply, increasing by nearly $189 billion from the previous quarter, significantly higher than the previously estimated increase of about $150 billion. This was mainly driven by retail trade, especially department stores and other industries such as information. driven by.

Generally speaking, the final value of GDP and its basic components usually do not change much compared with the estimates previously released by the US government. It is unusual to see a sharp downward revision in consumer spending and a sharp upward revision in inventory investment.

2. Multiple macro data performed poorly. Can the U.S. economy escape recession?

U.S. first-quarter GDP data is disappointing. In the second quarter, when inflation is still high and interest rates are rising, how will the U.S. economy perform? U.S. second-quarter GDP The initial value will be announced at the end of July. Before that, we might as well use some of the latest data to roughly judge the economic situation of the United States in the second quarter.

1, May Core PCE price index Will inflation peak after continuous cooling?

In addition, is the most popular inflation indicator of the Federal Reserve . The U.S. core PCE price index (excluding food and energy prices), which has attracted much market attention, increased by 4.7% year-on-year in May, which is the lowest growth rate since November last year. , better than market expectations of 4.8%, and the previous value of 4.9%; the core PCE price index in May increased by 0.3% month-on-month, better than market expectations of 0.4%, and the same as the previous value.

Judging from the year-on-year growth rate, the latest PCE data seems to indicate that the core PCE price index has not deteriorated further and has been showing an optimistic downward trend for several consecutive months. However, it is worth noting that the core PCE price index is still near the levels of the 1980s, the same as in April, and still more than three times the expected inflation target of 2%. Looking at the month-on-month growth rate, the overall PCE and core PCE growth rates are second only to the highs in January and March.

On the other hand, the year-on-year growth rate of U.S. CPI in May hit a 40-year high, reaching 8.6%, and the gap between CPI and PCE is widening. The widening gap between the two could undermine market confidence that inflation is about to subside.

Some analysts believe that a moderate decline in PCE data may not be enough to affect the market. The lower-than-expected PCE price index will still cause prices to rise much faster than the Fed's target. Further rise in inflation expectations has basically become the market consensus.

Some analysts believe that measuring the core PCE price index is controversial because some commodity prices that have the greatest impact on daily life are not included. For example, the index pays less attention to the rising sub-costs such as housing. Low. In addition, energy and food, which are not included in the core PCE price index, contribute nearly 70% to the overall PCE on a month-on-month basis. Although energy and food prices have fallen since late May, they have still significantly raised the center of overall inflation. Coupled with the continued rise in housing prices, even though the peak of inflation may be forming, it is still difficult for inflation to subside.

2. Consumer spending shows signs of weakness. A U.S. economic recession is imminent?

On the same day that the May PCE data was released, the release of May personal consumption expenditure data heightened market concerns about economic recession. Data released by the U.S. Department of Commerce showed that U.S. personal consumption expenditures increased by 0.2% in May from the previous month. This was the smallest monthly increase this year, lower than market expectations of 0.4% and lower than the revised 0.6% in April.

However, more importantly, real personal consumption expenditures in May, adjusted for inflation, fell by 0.4% month-on-month, the first drop this year, while April's data was revised downwards to a slight increase of 0.3%. In addition, inflation-adjusted spending on goods fell 1.6% month-on-month in May, the largest decline this year, while spending on services increased 0.3%, reflecting a shift in consumer spending from goods to services. And as price pressures become more entrenched in the economy, consumer spending is likely to be further tightened by higher prices and rising interest rates.

It is obvious that record-high inflation is eroding the income and consumption levels of American consumers, and households are generally facing the pressure of rising prices. High inflation is changing consumer behavior, and consumer spending is shifting from goods during the epidemic to services. This also caused U.S. retail sales to fall by 0.3% month-on-month in May, lower than market expectations for a 0.1% increase. The month-on-month increase has been the highest since December 2021. Turn negative for the first time.

On the other hand, data also showed that personal income in the United States increased by 0.5% month-on-month in May, consistent with the previous month. This is the first time since December last year that the growth rate of expenditure has been lower than the growth rate of income. Inflation-adjusted after-tax income fell 0.1% in May, indicating that wage growth is struggling to keep up with rising prices.

Raymond James institutional equity strategist Tavis McCourt pointed out that U.S. consumers' spending is still higher than normal levels not because their income is much higher than normal, but because they are spending through the savings accumulated during the epidemic. The strategist expects that by September, most of consumers' excess savings will be spent.

The slowdown in consumer spending, the main driver of the U.S. economy, has added to growing concerns about the U.S. economic outlook. On July 1, the latest data from the Atlanta Fed GDPNow forecast model showed that the actual GDP growth rate (seasonally adjusted annualized growth rate) of the United States in the second quarter may be -2.1%, significantly lower than the -2.1% predicted on June 30. 1.0%.

In addition, the report showed that after the release of a series of latest data from the United States, the forecast model revised down the actual personal consumption expenditure growth in the second quarter to 0.8% from the previous 1.7%, and the actual total private domestic investment growth from the previous -13.2%. % was revised down to -15.2%.

In the past month or so, the Atlanta Fed’s GDPNow forecast model’s forecast of U.S. GDP in the second quarter has plummeted. In mid-May, the model once predicted a growth of 2.5%. Nicholas Colas, co-founder of DataTrek Research, said: "The closer we get to July 28 (preliminary second-quarter GDP), the more accurate the GDPNow forecast model tends to be."

After weak personal consumption expenditure data , S&P Global Market Intelligence (SP Global Market Intelligence) lowered its expectations for the U.S. economy. The agency expects U.S. GDP to contract 1.5% year-on-year in the second quarter, and earlier this week it also expected a slight increase in the economy.

Stifel Financial chief economist Lindsey Piegza said the latest data solidified evidence of a downward trend in consumer spending, the backbone of the economy, and there was very little hope that the economy could avoid a near-term recession.

If U.S. GDP continues to shrink in the second quarter as predicted, it will be two consecutive quarters of negative growth for the U.S. economy and meet the commonly-known criteria for entering a recession, that is, "negative GDP for two consecutive quarters."

3. The ISM Manufacturing PMI of the United States in June hit a two-year low. Both the new orders and employment index fell into contraction.

Among them, the new orders index was 49.2, falling below the 50 boom-bust line, falling sharply from the previous value of 55.1, hitting the lowest level since May 2020; this sub-data shows that high inflation and increased inventories have slowed consumer spending. Resulting in a significant reduction in new orders.

In addition, the employment index further fell from 49.6 in May to 47.3 in June, hitting a new low since August 2020, indicating that the pace of corporate recruitment continues to slow down and recruitment difficulties, and labor-related capacity constraints have not yet been resolved. The inventory index rose slightly to 56 in June from 55.9 in May, close to the highest level since 2010. The price payment index fell to 78.5 from 82.2 in May. The index has shown a continuous downward trend in recent months, indicating that raw material prices have begun to decline.

In this regard, S&P Global Chief Business Economist Chris Williamson believes that June’s data shows that the manufacturing industry has exerted a drag on GDP, and this drag may intensify after entering the summer; forward-looking indicators such as the new orders index have deteriorated significantly. Highlighting the increased risks of industrial downturn. At the same time, household demand growth is slowing, and tighter financial conditions and a poor economic outlook are also slowing corporate capital spending significantly, he added.

It is worth mentioning that Chris Williamson also added that the sharp decline in input orders from manufacturers means that the decline in demand for inputs will ease the pressure on the supply chain and keep commodity prices stable, which will help easing broader inflationary pressures in the coming months.

In addition to the ISM Manufacturing PMI, several other closely watched manufacturing data also performed poorly. On June 27, the overall business activity index of the Texas Manufacturing Survey in June released by the Federal Reserve Bank of Dallas plummeted to -17.7 from -7.3 in May, which was far less than the -3.1 expected by the market and hit the lowest point since May 2020. . Data released the next day showed that the Richmond Federal Reserve Manufacturing Index in June fell sharply to -19 from -9 in May, which was also far worse than market expectations of -5, hitting the lowest level since May 2020. level.

Earlier on June 23, data released by financial data provider IHS Markit showed that the preliminary values ​​of the U.S. Markit manufacturing, service industry, and comprehensive PMI in June were all lower than expected. Among them, the manufacturing PMI was 52.4, a 23-month low; the manufacturing output index fell to 49.6, falling below the 50 line for the first time in two years; the service industry and the comprehensive PMI both hit a 5-month low.

One of the few bright spots is the May manufacturing data released on July 5. Data show that the U.S. manufacturing data in May was better than expected, with the final month-on-month growth of durable goods orders being 0.8%, higher than expected and the initial value of 0.7%; factory orders in May increased by 1.6% month-on-month, significantly better than the expected 0.5% and 0.7%. The previous value was 0.3%.

The collapse of multiple U.S. manufacturing data has heightened market concerns about a U.S. economic recession. Worsening forward-looking indicators indicate a significant slowdown in growth in some economic sectors, especially manufacturing activity, which may foreshadow the U.S. economy. Still weak in the future.

4, the U.S. consumer confidence index hit a 16-month low

In this regard, Lynn Franco, senior director of economic indicators at the Conference Board, said: "Consumers are increasingly concerned about inflation, especially rising gasoline and food prices." "The current expectations index is well below 80, which indicates that the economy will be better in 2022." The risk of a slowdown in the second half of the year and a recession by the end of the year is increasing. "

In addition, the final value of the U.S. consumer confidence index in June was 50, lower than expected and the initial value of 50.2, and significantly lower than 5. The month-end value was 58.4, a record low. Nearly 30% of respondents expect U.S. business conditions to continue to deteriorate in the second half of this year, the largest share since the depths of the financial crisis in March 2009.

In addition to consumers, high inflation and the Federal Reserve's aggressive interest rate hikes have also made investors more pessimistic. The quarterly CFO survey conducted by Duke University's Fuqua School of Business in partnership with the Federal Reserve Bank of Richmond and Atlanta showed that respondents' expectations for economic growth have declined, with the optimism index falling to 50.7, the lowest level since late 2012. In addition, CFOs’ average estimate of real GDP growth in the next 12 months is 1.5%, lower than the 2.5% forecast in the last survey; more than 20% of the CFOs surveyed believe that U.S. GDP may experience negative growth in the next year, with high Compared with the 12% ratio in the previous survey.

The "scattering" of market confidence is undoubtedly bad news. The pessimistic attitude of consumers and businesses towards economic growth in the next few months may inhibit spending and investment, thereby affecting economic recovery. The prospects for the US economy to avoid recession are not clear.

3. What do Wall Street major banks think?

The collapse of economic data one after another seems to prove that the U.S. economy is already on the verge of recession.

JPMorgan Chase lowered its forecast for U.S. second-quarter GDP year-on-year growth to 1% from the previous 2.5%. Bob Michele, chief investment officer of J.P. Morgan Asset Management since the stagflation crisis of the early 1980s, said: "Our forecast for the U.S. economy is already close to recession levels, which is very dangerous."

He believes that the current U.S. economic outlook is It looks worse, with a U.S. recession more likely than a soft landing. He also said that with inflation looking increasingly entrenched, major central banks are still a long way from reversing the loosest excesses of the easy money era.

S&P Global Ratings last week lowered its forecast for U.S. GDP growth in 2023 to 1.6% from 2% in May, and kept the growth rate in 2022 unchanged at 2.4%. Beth Ann Bovino, managing director and chief economist for the U.S. and Canada at the agency, said last week that economic momentum may protect the U.S. economy from a recession in 2022, but as extremely high prices destroy purchasing power and the Federal Reserve’s aggressive tightening Interest rate policies have increased borrowing costs and supply chain constraints continue to worsen. It is difficult to see the economy being "safe and sound" in 2023.

Beth Ann Bovino also pointed out that the recession risk for the U.S. economy is expected to be 40% (35%-45% range), which reflects a larger surge in prices as the Federal Reserve adopts a more aggressive interest rate hike policy in 2023. .

Jim Reid, head of credit strategy and thematic research at Deutsche Bank , surveyed Wall Street professionals on the recession. The survey results show that 88% of respondents believe that the U.S. economy will be in recession before the end of 2023. This proportion was 78% last month and has gradually increased in recent months.In addition, 17% of respondents believe that the U.S. economic recession will begin this year, which is higher than 13% last month and 0% in February. Only 8% of respondents believe the U.S. economy will not be in recession before 2024, down from 45% in February.

Michael Wilson, a well-known Wall Street short seller and Morgan Stanley chief equity strategist, said in the latest report that U.S. economic growth is slowing down significantly, even more seriously than they expected, and expected the S&P 500 Index will drop to 3000 later this year.

4. Summary

Inflation is still running at a high level, consumer spending as the economic engine is weak, consumer and business confidence is low, economic activity expansion is slowing down, and the recent successive "inaccuracies" in a number of macroeconomic data have made the market optimistic about the U.S. economy. No more confidence.

At present, the mainstream thinking in the market is that the US economic recession is approaching, but it has not yet arrived. Many economists expect a recession to become increasingly likely by the end of next year, but also believe it will not be as devastating as the 2007-2009 financial crisis and successive recessions in the 1980s. People suffer, relatively speaking, may be milder.

Although it may be a mild recession, stubbornly high inflation may cause the Federal Reserve to tighten monetary policy firmly rather than rush to reverse the economic decline. In a speech last Wednesday, Federal Reserve Chairman Jerome Powell reiterated his long-held view that the U.S. economy is strong enough to handle tightening of monetary policy. However, Powell also acknowledged that the task of achieving a "soft landing" has "clearly become more challenging" in recent months. He emphasized that the longer high inflation lasts, the more likely it is that inflation expectations will get out of control and make a "soft landing" more difficult.

In addition to Powell, many Federal Reserve officials, including St. Louis Fed President Bullard, San Francisco Fed President Daly, New York Fed President Williams, etc., have firm stance on raising interest rates and insist that the U.S. economy will not decline.

However, what is interesting is that although the Federal Reserve has repeatedly stated its determination to raise interest rates to combat inflation, the market's expectations for the Federal Reserve's interest rate hikes have cooled down. Futures traders continue to bet that the Fed will raise interest rates by another 75 basis points next month. At the same time, these traders also expect the Fed to slow the pace of interest rate hikes starting in November and stop raising interest rates in early 2023. Currently, the market expects interest rates to rise to a range of 3.25%-3.5% by the end of the year, down from the 3.5%-3.75% range a week ago.

According to the latest data from the Chicago Mercantile Exchange Group (CME) FedWatch tool, as of press time, the probability of the Fed raising interest rates by 75 basis points in July is 85.6%, down from 87.3% a week ago; The probability of a base point is 14.4%. In addition, the probability of a cumulative 100 basis point interest rate hike by September is 11.6%, the probability of a cumulative 125 basis point interest rate hike is 84.9%, and the probability of a cumulative 150 basis point interest rate hike is 3.5%.

Market expectations for interest rate hikes have cooled and the Fed's determination to raise interest rates has diverged. Coupled with the impact of the intensifying risk of a U.S. economic recession, the next trend of the U.S. stock market may be disturbing. How the inflation and economic conditions in the United States will perform? The upcoming CPI and GDP data in July will give the market the answer.