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A US recession is still on the table despite moderating inflation and a steady jobless rate, according to Raymond James.
The firm said consumer strength and employment trends are set to weaken after a few strong years.
These are the four reasons why Raymond James has not yet counted out a US recession.
A resilient economy has led many Wall Street strategists to delay or outright cancel their calls for a US recession — but not Raymond James.
The investment firm said in a Friday note that it still expects a mild recession to hit the US economy as a lot of the strength seen in consumer spending and the labor market is finally showing signs of weakening.
“While sentiment has made an abrupt shift, there are still plenty of risks on the horizon,” Raymond James chief investment officer Larry Adam said. “Consumers are starting to feel some financial stress!”
These are the four reasons why he is sticking with his call that a mild recession is set to hit the US economy in the coming months.
1. Consumer strength is likely to weaken.
Over the last year, a tight labor market, strong wage gains and excess savings from the pandemic have propped up consumption, but those tailwinds are finally fading, according to the note.
“With the excess savings buffer nearly depleted and likely to be exhausted by year end, student loan payments resuming on October 1 after a three-year pause, and gas prices ticking higher, consumer spending is vulnerable to a pullback. And while consumers’ balance sheets have been reasonably healthy, signs of stress are building,” Adam said.
He highlighted recent increases in delinquency rates for credit cards, auto loans, and mortgages, as well as rising credit card balances and borrowing rates as other factors that will likely slow spending.
2. Employment trends are slowly declining.
“While the unemployment rate continues to hover near a 53-year low of 3.5%, there are signs that the labor market is cooling. Not only did the pace of job growth ease to its lowest level since December 2020, the six prior payroll reports were downwardly revised—the longest negative streak since 2009,” Adam said.
Other indicators that suggest upcoming weakness in the economy include declining number of job openings, falling temp jobs, and a pullback in the average workweek.
“While we’re not expecting a sharp rise in the unemployment rate during this business cycle, we do expect this softening trend to continue into year end,” he added.
3. Strength in services and good spending is moderating.
After two summers of “revenge” travel, airline fares have moderated on a monthly basis for three straight months, restaurant activity is lower compared to a year ago, and theme park attendance has softened, Adam pointed out.
“And the short-term economic boost from Taylor Swift’s ‘Eras Tour’ is ending as it moves overseas. Goods spending is unlikely to pick up the slack in service spending this time — suggesting that goods and service spending will be on a flat to downward trajectory,” he said.
4. Clouds are forming after capex surge.
“The percentage of small businesses that view now as a bad time to expand due to higher interest rates is near the highest level on record… the composite of capex plans in the regional Fed Manufacturing surveys remains near the lowest level since 2009 (excluding COVID periods)… only 22% of CEOs plan to increase their capex budgets over the next 12 months—the lowest level since 2020,” Adam said.
“This sour sentiment suggests capex is likely to be challenged going forward. And this has already started to translate into weaker demand for loans, as the net percentage of banks reporting stronger demand for loans has fallen to its lowest level since 2009.”