Recent Economic Data

Two problematic pieces of data have recently come out. One was the New York City Fed’s report that showed the largest contraction in New York State’s manufacturing activity since April 2009 (near the bottom of the recession). The data on the site linked above goes back to 2001, and there has only been one instance in which the indicator fell to its current level without a recession (April 2003).

But perhaps even more concerning is the Atlanta Fed’s Q3 GDP forecast of only 0.7%. Given that Q1 growth was only 0.6%, and Q2 was a mediocre 2.3%, a return to near-zero growth in Q3 could suggest that an economic contraction is on the horizon.

So, what does this mean for the stock market? I think it means that stocks will have to fall enough to discount a mild recession. Historically, that entails a 15-25% drop in the broad market. I do not know whether a recession will actually happen, but I think if it does happen, it would be relatively shallow for two reasons. The first is that, I don’t think there has been a bubble in the markets or the economy, and I say that as someone who has been bearish on stocks since March. The second reason is that inflation is low enough to allow the Fed to delay interest rate increases if necessary.

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