'This economy is stronger than its reputation'

Is the economy about to tip into recession?

Strategists on Wall Street have talked about the US falling into an “earnings recession,” a “revenue recession,” and the possibility of a full-on economic recession that would see the economy shrink.

But in an email on Tuesday, Deutsche Bank economist Torsten Sløk wrote that despite the incessant drumbeat he hears from clients about an economy doing worse than people are willing to acknowledge, the exact opposite is in fact true: things are way better than people recognise.

“In client meetings I frequently hear statements such as ‘the US economy is weak,’ and ‘there are too many problems for the Fed to hike rates’ and ‘things are not getting better,'” Sløk writes.

“Let’s take a look at the data: The chart below shows that lower income groups are currently close to all-time highs when it comes to optimism about the future. Think about this statistic next time someone talks to you about the declining participation rate, the lack of wage growth, and QE4. This is not an economy that is about to enter recession.”

And so the point Sløk is driving at is that nothing is more important than the US consumer.

Consumer spending accounts for about two-thirds of GDP and the consumers most likely to change their behaviour due to an increase in their income or simply a more upbeat view of their future prospects are folks in the lowest income bracket.

Overall readings on consumer confidence are near cycle highs, but the details of these reports are even more encouraging. “In my view, there is a big disconnect between the current narrative in both equity and rates markets and the actual economic data,” Sløk writes.

“This economy is stronger than its reputation and for some reason many investors want to hold onto the 2009 story of ‘the economy is not good.’ We are likely to reach full capacity over the coming 12 months and that is why Yellen, Fischer, and Dudley continue to talk about liftoff in 2015.”

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