Dare I say it out loud? Has Goldilocks reentered the building?
The U.S. economy has shown remarkable resilience in the face of 10 successive rate hikes from the Federal Reserve, taking short-term interest rates from near-zero to 5% in just over a year, prompting predictions of a recession from many economists and market pundits, myself included.
Has the economy, as my long-time friend and colleague, Art Cashin first described it, entered a "Goldilocks" phase? The economy is not too strong, not too weak, but just right?
There, of course, was justification for a recession prediction over the last many months.
As the Fed rapidly hiked rates, residential real estate slid into recession, manufacturing contracted, auto sales stalled and market-based indicators of a recession began flashing red.
The yield curve inverted deeply, which since 1968, has ushered in a recession each and every time.
Granted, we're still in the six- to 15-month window in which a recession followed an inversion, but the economy appears to be getting stronger, not weaker, as one might expect.
Signs of improvement
Leading economic indicators have been negative for over a year now. We've never seen a stretch of declines in LEI without a recession hitting the economy … so too for the decline in home sales.
However, first-quarter GDP was revised upward to show a 2% annual rate of growth.
The unemployment rate remains near historic lows and sits at the lowest level in history for people of color.
Construction spending is surging while the rollout of new technologies involving generative artificial intelligence is boosting the tech sector and, at least potentially, ushering in yet another era of disinflation or, quite possibly, outright deflation.
Where some of us erred or may have erred — the jury is still out — is that the economy's resilience comes from several factors that may have been underestimated even as the Fed raised rates so quickly and so dramatically since early 2022.
First, both corporations and households locked in low, long-term interest rates before the Fed began tightening monetary policy. That would suggest interest rate sensitivity is lower today than in other tightening cycles.
While it's true that households locked in to 3.5% mortgages are unlikely to sell their homes, constraining supply among existing home inventory, those same homeowners are not suffering the sticker shock normally associated with rate hikes.
Hence, they can keep spending money without having to service higher monthly mortgage payments.
Same for corporations, which "termed out" their debt, borrowing cheaply with long-term debt that doesn't have to be refinanced anytime soon, giving them more staying power in a slightly slower growth economy.
Policy help
Equally important, despite expectations to the contrary, fiscal stimulus is back and providing a potent offset to monetary tightening.
The CHIPS and Science Act has led to a construction boom in advanced manufacturing, with some $189 billion being sunk into building out capacity for high technology goods, most importantly, advanced computer chips.
There's also a building boom going on in residential real estate, helping to reduce the persistent supply shortage of new homes across the country.
Similarly, the Inflation Reduction Act is providing meaningful incentives for energy and power companies to build out new energy infrastructure while also supporting additional drilling for oil and gas in selected cases.
The U.S., again, is the largest producer of oil in the world. That has kept down the prices of oil and gasoline, giving consumers more disposable income than one might have forecast with the ongoing war between Russia and Ukraine, multiple output cuts among OPEC producers and relatively steady demand for energy around the world.
The upshot of all this is that among major industrialized nations, the U.S. is growing faster while inflation is declining more rapidly than anywhere else on the planet.
It's a good story as we approach Independence Day.
America is also becoming economically independent in a variety of ways that bodes well, not just for the near future, but also for the longer run.
Now watch, just as soon as I submit this column, a recession will set in!