Breitbart Business Digest: The Hunt for the Missing Recession

The Economy Is Still Accelerating in May

The most heralded recession in U.S. history still is not showing up.

It was nearly a month ago that we pointed out that the economy appeared to be resurgent after turning sluggish in February and March. This garnered us quite a few skeptically cocked-eye brows. The inverted yield curve, the year-long slump in Leading Economic Indicators, and the Bloomberg consensus of economists all say the economy is headed for a recession. How can we say growth is surging?

To be sure, growth is not surging everywhere in the U.S. economy. U.S. trucking volumes, which have been falling for months, are down to prepandemic levels, according to a recent episode of the Odd Lots podcast. The manufacturing surveys from the regional Fed banks have been mostly in contraction territory since sometime last year, with the Richmond Fed reporting on Tuesday that its index had tumbled even further in May. After edging above the 50 point threshold dividing expansion from contraction in April, the S&P Global manufacturing purchasing managers index sank back down to the bog of contraction.

Manufacturing Is Slumping But Employment Still Strong

But we knew this was going to be a tough year for manufacturing. Consumer spending is finally shifting from goods to services as people travel more, dine out more, and return to something closer to a normal balance of household expenditures. The Federal Reserve has pretty much stopped reading the goods side of the inflation reports and is now very much focused on the services side.

Perhaps more extraordinarily, employment in the goods-producing sectors of the economy is proving to be remarkably strong. The Richmond Fed’s index for employment rose from minus five in March to zero in April to five in May. The gauge of expectations for employment also strengthened. In the April employment report, the goods side of the economy added 33,000 jobs, up from the 17,000 job contraction in March.

It’s not all good news for manufacturing jobs. The Philly Fed’s employment gauge was negative for the third straight month, suggesting shrinking payrolls. But even here, it was just 15 percent of firms who said they shrank payrolls, while seven percent said their payrolls grew. Over three out of four manufacturers reported payrolls unchanged. Again: not great but not really the picture of an economy that is on the verge of a recession.

Housing Rebounding and Services Surging

Meanwhile, the housing market continues to show strength. New home sales for April came in higher than expected. The weight of 6.4 percent interest rates on mortgages appears to be less of a drag than it was. This is probably not unrelated to the strength of the labor market. We’re at full employment, and there are still very few layoffs, which gives people the confidence to buy a home even at the higher prevailing rates.

The spending that is coming out of the goods sector is clearly flowing into the services sector. The S&P Global “flash” purchasing managers index (PMI) showed the fastest rate of expansion in a year. Job growth is accelerating in services thanks to surging demand, adding to inflationary pressures.

“The inflation picture is also changing. Whereas manufacturing prices spiked higher during the pandemic due to strong demand and deteriorating supply, it is now the service sector’s turn to be hiking prices amid resurgent demand and an inability to cope with order inflows due to a lack of capacity,” Chris Williamson, chief economist at S&P Global Market Intelligence, pointed out in his commentary. “Jobs growth has accelerated as service providers companies seek to meet demand, but this tightening labour market amid strong demand will be a concern as a fuel of further inflationary pressures.”

Some Unfashionable Monetarism

There is almost nothing as unfashionable in economics these days as watching the money supply. As we have pointed out, however, keeping an eye on the money supply has turned out to be a good economic guide when so many other indicators appear to have gone haywire.

The chart below shows the year-over-year percentage change in the money supply, as measured by M2. Growth in M2 peaked in early 2021, and you can see the steep decline in the rate of growth after the peak. But it is only when the blue line falls below the black line that the money supply actually starts shrinking. In other words, we were still growing the money supply until Thanksgiving of last year.

We think this goes a long way to explaining why inflation has remained stubbornly high and growth more robust than expected.

It also contains a warning. Take a look at the far right of the chart. The money supply is still shrinking, but the contraction is no longer accelerating. In fact, the decline of M2 has been steady since the beginning of April—which is when the economy began to rebound.

The economy is still most likely headed for a recession. Our reason for expecting this is quite simple: a mild recession is likely the minimum it will take to squeeze inflation back down to two percent. But we increasingly think the recession is likely to show up quite late, probably not until sometime next year.