US economic conditions go from bad to worse

BCA Research paints a bleak picture of the US economy after conditions deteriorate.

Leading indicators appear to be pointing to a weaking US economy and potential recession, according to the latest BCA Research monthly portfolio update.

“US economic data has continued to deteriorate, with the leading economic indicator pointing to a recession,” the report found. “The situation in Europe and China looks even worse.”

Since releasing the previous quarterly publication, when BCA Research went underweight equities, economic data has deteriorated despite the 5 per cent rally in global equities during July.

“A classic bear market rally, we would argue,” the report highlights. “PMIs are starting to dip below 50. The US leading economic indicator has fallen for four months in a row, historically a reliable sign of impending recession.”

Adding to the pain, inflation isn’t going away anytime soon, with a recession looking more than likely. 

“Inflation remains sticky, with US wages now rising strongly. Supply-chain repair will bring core PCE inflation down to 4 per cent – but to get to 2 per cent will require a recession,” the report states.

“The market is betting that the Fed will lose its nerve early next year and start cutting rates. We think this is unlikely: The Fed won’t want to repeat the mistakes it made in the 1970s.”

Those mistakes include then-chairman Arthur Burns cutting interest rates too quickly in 1974 at the first sign of a slowdown. Inflation never fell below 5 per cent. The report mentions Federal Reserve chair Powell emphasising the battle against inflation being unconditional. Monetary policy will remain tight until inflation clearly heads back to 2 per cent, it states.

In the report, BCA Research continues to prefer the lower-beta US market, given the greater economic resilience of the US. “The USD will strengthen further, and industrial commodities will fall. Credit looks more attractive for long-term investors than equities,” it continues.

“Investors should remain defensively positioned on the 12-month investment horizon, stay underweight equities and hold as much cash as mandates allow. Government bonds represent a good hedge; inflation-linked ones are also now more attractively valued.”