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Thoughts from Last Week
Source: S&P Global, J.P. Morgan Asset Management.
As investors mull the increasing odds of a U.S. recession, data out last week confirmed a recent weakening in the economy. The June flash PMIs showed larger-than-anticipated declines in the headline measures with many key details deteriorating. In the manufacturing survey, the headline composite fell from 57.0 in May to 52.4, with a sharp weakening in the important measures tied to new orders and output. The services sector also showed signs of softness, with the headline composite declining from 53.4 in May to 51.6 and the measure of new business dropping 7.5pts—the largest decline since the onset of the pandemic. With consumer sentiment at a record low level, these data show that the economy is now seeing the impact of higher commodity prices and higher interest rates on demand. However, there are few signs of weakening in the labor market so far with initial jobless claims edging down to 229,000 over the past week.
For investors, the unusual juxtaposition of pent-up demand for goods and services and excess demand for labor with a clear softening in retail sales and consumer confidence makes it very challenging to conclude if we are on the brink of a recession. However, if we are, there’s no reason to expect that it will be nearly as severe as the last two. Moreover, since the economy spends the majority of the time in expansion, for long-term investors, it is ultimately more important to be well-positioned for expansions than to try to tactically trade around recessions.