US Macroeconomic Update – Inflation Forecasting, Rate Expectations & 2023 Recessionary Outlook

1.

Could you begin with an overview of the US economy, highlighting the major macro factors and shifts over the last couple of months?

2.

Looking at GDP growth, you’ve given us your outlook and you think that it’s probably going to be a little bit less than 1%. What assumptions are driving those forecasts and can you extend your predictions for the next 1-3 years?

3.

Looking at February 2023’s JOLTS [Job Openings and Labor Turnover Survey] report, we saw that labour force participation increased over the past month, which is considered a good sign. Why did we see this positive trend?

4.

We’re seeing a significant lack of labour force participation, concentrated particularly in younger men. Can you unpack that trend? Why are we seeing such an elevated lack of labour participation in this one specific demographic?

5.

Labour economist specialists in previous Interviews [see US Labour Market – Rate Resilience, Wage Movement & 2023 Industry Trend Breakdown – 15 February 2023] mentioned that there is another potential issue regarding reporting. Do you think the surveys built around how the US measures labour are as effective as they can be?

6.

There are currently two open jobs for every unemployed individual in the US. Why is there such a large divergence in job openings to unemployed people in this post-pandemic world?

7.

The consumer is facing a significant amount of pressure today. We’re seeing gen Z in particular holding the highest levels of credit card debt for decades now. Regarding this pickiness for where one would like to work vs when they have to work, how long can this last for?

8.

Do you still see taming inflation as a possibility without the unemployment rate reaching 4.5%?

9.

You mentioned how a lot of job openings tend to be very specific. Is there an argument to be made that US might be suffering from a lack of the specific talent it needs?

10.

We know that inflation has been far more persistent than anyone has expected over 2023. What would you attribute that stickiness to?

11.

With the highly anticipated March 2023 FOMC [Federal Open Market Committee] meeting, we saw the Federal Reserve raise interest rates by another 25 bps. Reading between the lines, can you describe the messaging here? Based on the current state of affairs, how long could it take for inflation to reach the target range of 2-2.5%?

12.

You mentioned how there are bank problems, but they’ve proven not to be the overall driver of Fed policy. We also heard Fed Chair Jerome Powell say it did consider a pause in these rate increases. To what extent was that decision impacted by ongoing development in regional banking? If we hadn’t seen the most recent developments in banking occur, what would we have expected rate-wise?

13.

Focusing on the banks, we saw some other interesting language from Jerome Powell. What can we pull out from his commentary on the banking sector? Are credit-conservative banks now driving the QT [quantitative tightening] shift instead of the Fed? Is it a passing of the baton?

14.

There’s a growing concern for regional banks – aside from what we’ve seen discussed over the last two weeks – which is that roughly 80% of commercial real estate debt is held by smaller banks. With a significant portion of loans in the commercial real estate space set to mature over the next 1-3 years, and with roughly USD 270bn in loans set to expire in 2023, do you think regional banks should be increasingly concerned about their exposure to risky commercial real estate debt?

15.

The core of the issue for regional banks over the last two weeks was the unrealised losses on their bond portfolios, but it’s quite difficult to gauge the extent of these unrealised losses on banks’ commercial real estate loan portfolios. What level of concern do you have here? To your point, in the office space, particularly in metropolitan areas, we’re seeing vacancy rates hit record-high numbers. For example, we recently saw Blackstone default on a commercial mortgage-backed security, so the firm is now defaulting on some of its payments. What do you think others are going to do?

16.

What approach can we expect from many landlords when their loans reach maturity? Can we expect refinancing? I imagine not, given higher rates. What options do they have and which do you think they will take?

17.

You mentioned residential housing. How can owners’ equivalent rent meaningfully come down without a substantial reduction in home values? Can this even happen with the amount of undersupply in the market?

18.

Can you unpack the 24 February 2023 PCE [Personal Consumption Expenditures] print? What stood out to you the most there?

19.

For how long can we expect to see elevations in prices and consumer resilience? Do you think any element of the recent news around the regional bank space will impair consumers’ confidence and rein in what we might expect to see in the upcoming March 2023 PCE print?

20.

You can explain part of the resilient spending with a lot of pent-up demand over the last couple of years, but what about the mass money printing driving prices as we look to assess M1 more specifically? Why isn’t M1 higher?

21.

M1 went from around USD 4tn to USD 20tn. How is inflation only 8%?

22.

We’re seeing an increasing number of countries discuss moving away from dealing with international trade in the US dollar – they’re calling it dedollarisation. What are the implications of a coordinated move away from the US dollar being the trade currency standard, both for the US and other countries?

23.

There are some arguments being made that maintaining the dollar as the global trade currency standard works more in the favour of other countries vs the US. Can you assess those claims, and do you think that some discussions on dedollarisation are misinformed?

24.

What role does the continuing tension between US and China trade play for the rest of the US domestic macroeconomy?

25.

Do you think global trade is getting increasingly isolationist?

26.

There are people arguing that the Inflation Reduction Act has been feeding some of the isolationism, particularly regarding the US’s relationship with Europe. We’re now six months out from the inception of the act. Can you assess how effective this legislation has been and what some of the actualised knock-on effects in terms of impairing trade have been?

27.

Is there any argument to be made that US trade isolationism – including a more elevated tariff strategy and a manufacturing re-shoring – is one way for the country to look to recover itself?

28.

You mentioned how the Inflation Reduction Act played a role in exacerbating part of the federal deficit, so what role does uncertainty around the US government defaulting on its debt play in what we’re seeing today? How political has this become?

29.

Would you name any sectoral winners based on the current state of economic affairs in the US?

30.

Based on February 2023’s surveys, commentators are now predicting there is a 54.59% chance the US will enter into a recession, and that’s down from 57.13% in January. How would you evaluate this narrative? Is it a shallow recession or a long-holding one? Is it a soft or hard landing?

31.

Do you hold any contrarian views regarding the US economy that you believe market commentators or investors commonly get wrong? Is there anything you’d like to leave us with?