The runup in stock and house prices since the pandemic is eye-popping. Stocks are up 60% and homes 50%. Household net worth has swelled by $300k per household. While only 2/3 of households are benefiting, this is big money and a big part of the U.S. economy’s current success. The record stock and house prices reflect the strong economy and in turn power it. This works through the so-called wealth effect – wealthier households are able and willing to save less and spend more. Indeed, stalwart consumer spending has driven the economy’s growth.

You’re no doubt aware that the Moody’s Analytics’ Presidential election model predicts that Biden will be re-elected. While based on a bunch of assumptions such as voter turnout and the popularity of 3rd parties and the economy’s performance, I’m confident in the result. But… …having said this, based on the modeling, it is clear the election will be close and hinge on a few key factors. If 3rd party candidates catch on at all, they will swing the election to Trump. If gas prices rise to near $4/gallon, from closer to $3 currently, Biden will lose.

Not only did the economy avoid recession in 2023, as widely feared, the economy had a stellar year. The latest evidence is the just released Moody’s repeat sales house price index for December. Prices are up 5% from a year ago and almost 50% since just prior to the pandemic. House prices are off from their all-time highs in and around Texas and the Pacific Northwest, but only modestly, and they continue to push higher in the Northeast, and industrial Midwest and Southeast. In Philly, my hometown, house prices are up 7% from a year ago.

It’s conventional wisdom that most Americans believe the economy is performing badly. But do they? Color me skeptical. Most analysis that comes to this conclusion rests on the University of Michigan consumer sentiment survey, which is VERY weak. But this survey is flawed. UMich is a survey of 600 people who are asked their political party affiliation. Once asked this, all other Qs are answered through this prism. As such, Rs believe the economy is cratering - worse than in the worst of the financial crisis or the pandemic shutdowns. Huh?

As 2023 comes to an end, it is increasingly clear that not only did the economy avoid a widely anticipated recession, but it was also a great year for the economy. Real GDP is on track to grow a heady 2.5%, unemployment has remained below 4%, and inflation has quickly receded. Most encouraging is the revival of the supply-side of the economy. Productivity growth has rebounded, and the labor force is surging due to more participation and immigration. That’s how the economy has been able to grow so strongly with such low unemployment and less inflation.

Handwringing over the increase in household debt and delinquency has been loud. The worry is that consumers are stretched, will soon stop spending and recession will ensue. This worry is way overdone, as inflation recedes so has borrowing, and delinquency will follow next year. Credit cards, consumer finance loans, and auto loans did take off after the pandemic shutdowns ended. This reflected the higher inflation, as we had to spend more to buy the same stuff, and as the higher prices cut into the purchasing power of particularly low-income households.

The economy is hanging tough in part because of the graceful adjustment of asset prices to Fed tightening. While overvalued stock, bond and real estate markets have bent, they have not broken. Americans remain wealthier than before the pandemic, and key to why they keep spending. Housing is the poster child, despite surging mortgage rates, prices nationwide have simply gone sideways since peaking in summer 2022. Prices are still up a stunning 40% since the pandemic hit. Thank the severe affordable housing shortage for propping up prices.

The economy is meaningfully less interest rate sensitive than in times past. The tweet thread that follows lays out the case why, but this is a big reason why the economy has avoided recession despite the Federal Reserve’s aggressive rate hikes. Using some jargon, r* has risen. A big reason for the economy’s increasing rate insensitivity is that households have admirably locked in the previously record low rates. Only 10% of household debts have rates that adjust within one-year of a change in market rates. That’s down from 35% in the early 1980s.

Contrary to the fears of many, inflation can recede without a recession or anything close. That’s the overarching message in the GDP report for the 3rd quarter released last week. Real GDP grew by a hot 4.9% but the core consumer expenditure deflator increased by a cool 2.4%. Behind the stellar report is the fading economic fallout from the pandemic and Russian war. These massive global supply shocks hammered growth and fanned inflation, and while they continue to reverberate (e.g. sky-high new vehicle prices), they should settle in coming months.

If you had told me a few months ago that today 10-year Treasury yields would be near 5% and mortgage rates over 8%, I probably would have told you that the stock market would be down big and the economy headed to recession. While that still could happen, odds are good that it won’t. That’s because the surge in rates hasn’t been fueled by high inflation or rising inflation expectations, which is what I would have likely assumed in that hypothetical. If so, the Fed would still be tightening policy, and that would be a mortal threat to stocks and the economy.

As a professional economist, I do lots of forecasting. Some forecasts I’m confident in, some not so much. I’m confident that the growth in consumer prices for shelter is headed much lower and that this will push overall inflation back near the Fed’s target by this time next year. My confidence rests on market rents, which have gone flat over the past year. This will weigh on the growth in the shelter CPI in the coming year, given that the BLS uses market rents in its construction of the CPI, and that it takes about a year for rental leases to roll over.

The August jobs report was packed with good economic news. Especially good was the boomy growth in labor supply. Underlying labor force growth - abstracting from the vagaries of the monthly data - is a strong near 250k per month. More supply supports more jobs without inflation. The report makes clear that the economy is not at full employment. How could it be with participation still rising and so many people coming into the workforce? The report also makes clear that the economy can support lots of job growth without fanning wages and inflation.

What recession? The consensus view that recession was virtually a slam dunk looks increasingly off base. Yes, there will eventually be one, but odds that a downturn is dead ahead are receding. There are a bunch of reasons why the economy is hanging tough. Here are my top three… First, excess savings. Consumers couldn’t spend as they typically do during the pandemic as they were stuck at home. At the peak, excess savings amounted to 10% of GDP. Consumers have since been using the savings to supplement their purchasing power and calibrate their spending.

This would be a good time to batten down the financial hatches. Not because a recession is at hand, it’s not. And not because the banking system is set to unravel, it won’t. It’s because of a politically manufactured crisis around increasing the Treasury debt limit. Unless lawmakers act by early June on the limit, the X-date, the Treasury won’t be able to pay all of the government’s bills on time. Investors are worried that means them too. The yield on 1-month T-bills has surged in recent days as they mature on the other side of the X-date.

I testified on the debt limit before Senate Budget this am. There were bouts of partisanship, but I was impressed by the moments of bipartisanship. I’m more sure we won’t default. But lawmakers must act now, as June 8 is the X-date when Treasury can’t pay all the bills on time. The exact timing of the X-date is uncertain given the uncertainty regarding tax revenues, but April tax collections have been weak – 1/3 less than last year. While June 8 is most likely X-date, there is a meaningful probability it is as soon as June 1. Best case is August 8.

Recession over the next 12 months is avoidable given the economy’s resilience and assuming some reasonably good policymaking. The Fed must end its rate hikes after this week’s ¼ point increase, and lawmakers need to keep the drama over the debt limit from going off the rails. On the economy’s resilience, this goes to its solid fundamentals, including low household and corporate debt with low locked-in rates. It also goes to the still significant excess saving and business reticence to layoff workers given the labor shortages since before the pandemic.

National house prices fell by almost 0.5% in March, according to the Moody’s Analytics repeat sales index. Prices are down 2.2% from their peak last July. The March decline was bigger than expected, as the banking crisis may have prompted sellers to cut prices more aggressively. Prices are down most everywhere, with 4/5 of the nation’s 400+ metro areas suffering declines. The West is getting hit hardest, with prices off double-digits in the Bay Area, Seattle, and Vegas. Other notables getting hammered include Austin and the NY suburbs of NYC.

The 1.1% annualized increase in real GDP in the 1st quarter was close to script. This growth is just shy of the economy’s potential, precisely the growth the Fed is looking for. Fast enough growth to avoid recession, but slow enough to quell wage pressures and inflation. The composition of GDP growth was also favorable. Consumers continue to do their part, and government spending is also helping, as infrastructure spending kicks in. Less inventory accumulation was the big drag, but this is a plus for future growth.

The banking crisis is not over. Depositors remain on edge and continue to pull deposits from banks, moving their cash to money market funds. Money fund assets jumped again in the week ending last Wed and are up more in the past 2 weeks than any time save in the pandemic shutdown. Banks are also scrambling to ensure they have enough liquidity to meet the deposit withdrawals. Discount window borrowing at the Fed remains elevated, and the Fed’s new Bank Term Funding Facility is quickly expanding. Bank borrowing from the Federal Home Loan Banks has swelled.

I’m being asked why this banking crisis is different than the 2008-2009 global crisis. What follows are four reasons to think this time is different. This time, the problems are in a handful of mid-sized to small banks that got caught up in the bust in the tech sector (SVB) and the crypto market crash (Signature and Silvergate). In the GFC, nearly all financial institutions, big and small, got caught up in the downdraft.

I’ve been asked why so many economists are so adamant that recession is dead ahead and why they’ve been so wrong so far. Economists are stubborn adherents to history, and in times past when inflation is high and the Fed is jacking up rates in response, recession follows. Many of the leading indicators economists rely on to predict coming recessions are flashing red. The inversion of the Treasury curve – short-term rates are higher than long-term – is prescient in predicting downturns. And economists are loathed to say this time is different.