We still expect a recession in the United States later this year. This may be contra-indicated by the way things in the economy are clocking right along. There is presently GDP growth in the economy. The job statistics are remarkably strong for this point in the cycle, with an unemployment rate at a low 3.70%. Nevertheless, a little economic history is useful at points like this. In the last three recessions that the U.S. has had, the preceding three quarters showed an average of 2.5% real GDP growth. Everything looked fine, and then suddenly we were in recession. We think this is what is happening now and indeed, there are several very recent signs of slow-down, and most particularly in services.

1) The Supply Market overall gauge of service for May fell to 50.3% from the mid-50s just several months earlier. This was weaker than estimates and that 50.3% is almost a contraction.

2) The ISM Service Employment Index was down in May to 49.2%, which is in recession territory.

3) The Business Activity Index for May fell for the fourth month in a row to 51.3%, a three-year low.

4) The New Orders gauge, which is an indication of general business activity, fell to 52.9% from 56.1% in May.

In addition to these signs of general economic slowdown, inflation is showing signs of reduction as well. The stickiest and strongest part of inflation has been shelter costs, which is always a delayed indicator. However, the RealPage measure of effective rent growth, which will feed into overall shelter costs later, has fallen rapidly from 15.6% in March to just 2.3% in July! Shelter costs are likely to slow significantly this year and early next year, which will reduce overall inflation in a hurry. Further the ISM Non-Manufacturing Service PMI, which leads core PCE for services is down from 82% to 58.4% in March. This is another indicator that inflation is due to slow rapidly.

All these things lead us to be even more firm in our belief that a recession is coming in late 2023 or early 2024, despite the apparent health of the U.S. economy at this moment. To cut the gloom just a bit, one very heartening note is that manufacturing construction, almost certainly due to various governmental support acts that were passed in 2021 and 2022, has skyrocketed by 159% in the last two years. There are new manufacturing sites being opened up with loud publicity all over the country. This is a very solid underpinning for the manufacturing recovery, which is due to happen, we believe, beginning 2024 and continuing for quite some time thereafter.