Decreasing Possibility of US Recession... This Indicator to Watch

As optimism grows that the U.S. economy can achieve a soft landing this year, attention is focused on the U.S. Gross Domestic Product (GDP) data to be released on the 27th.

The U.S. Department of Commerce will announce the second-quarter GDP growth rate at 9:30 PM Korea time that day. The market expects the U.S. second-quarter GDP growth rate to be 1.8% annualized, slower than the previous quarter (2.0%) but maintaining steady growth.

The Congressional Budget Office (CBO) projects that GDP growth in the second half of this year will record an annualized rate of 0.4%, and this trend is expected to continue through 2025. Although high interest rates and rising unemployment pose burdens on consumers, it is not expected to slip into a recession.

Reflecting this optimism, economists surveyed by Bloomberg estimated the probability of the U.S. economy entering a recession within the next 12 months at 58%. This is a significant drop from 70% in December last year.

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The directions of other previously released indicators also largely aligned. U.S. retail sales in June increased by 0.2% month-over-month, falling short of the expected 0.5%, but considering that May retail sales were revised upward from 0.2% to 0.5%, this level meets expectations.

The Consumer Confidence Index for July, which provides insight into American consumer sentiment, reached its highest level in two years. Compiled by the U.S. economic research group The Conference Board and released the previous day, the index recorded 117, up from 110.1 in the prior month.

This index has shown three consecutive months of growth, continuing the upward trend following a sharp rise in June. Dana Peterson, Chief Economist at The Conference Board, evaluated that "the index has completely broken away from last year's sideways movement."

Alongside The Conference Board's confidence index, the University of Michigan Consumer Sentiment Index, another key indicator of consumer attitudes, also showed a rebound. The preliminary figure for July, released on the 15th, was 72.6, the highest level in 1 year and 10 months since September 2021.

As concerns about inflation and recession diminish, consumer sentiment is improving. However, it remains uncertain whether this improvement in consumer sentiment will translate into increased consumer demand. The scheduled end of the student loan repayment moratorium next month is also expected to negatively impact consumers' spending capacity.

[Image source=AP Yonhap News]

ABC News, citing economists, evaluated that "as the U.S. economy passes through a de facto Goldilocks phase, concerns about a severe recession have largely eased," adding that "the fate of the U.S. economy will be determined by the extent and effectiveness of interest rate hikes by the Federal Reserve (Fed)."

As expected by the market, the Fed raised the benchmark interest rate from 5.0?5.25% to 5.25?5.5% the day before. This hike marks the 11th increase since the tightening stance began in March last year. Regarding a possible rate hike in September, Fed Chair Jerome Powell left open both the possibility of a rate increase and a pause.

In its monetary policy statement, the Fed added, "when determining the necessary extent of additional policy firming to bring inflation back to the 2% target, we will consider the lagged effects of tightening on inflation and the economy, as well as economic and financial conditions." The wording in the policy statement was largely similar to the previous month. The phrase ‘additional policy firming’ was also retained.

Dean Maki, Chief Economist at Point72 Asset Management, said, "This (Fed's rate hike) proves that the U.S. economy is not slipping into a recession," adding, "The effects of the rate hikes have already been mostly reflected in the economy."

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