Some of the recent uptick in initial claims has been attributed to fraudulent activity in Massachusetts. Of course, a material rise in claims may simply be a matter of time. The consensus remains steadfast: there will be a recession at some point this year. Credit conditions continue to tighten.
But there are some important caveats. Firstly, banks had been tightening lending standards for months prior to the regional banking crisis, with little impact on high yield spreads.
Second, the housing market is now turning up, in response to a very modest drop in the 10-year Treasury yield year-to-date. The NAHB housing market index has risen every month so far this year, hitting 50 in May (‘neutral’).
The NAHB housing market index has, historically, tended to lead the Senior Loan Officer Survey.
Finally, the surveys may be giving the wrong signals once again. The Empire State survey suggests that US manufacturing should be deep in contraction. But the latest industrial production figures showed a 1.0% m/m expansion in manufacturing output in April. Production of motor vehicles & parts jumped 9.3% m/m to a record high.
Caterpillar’s sales of machinery and engines from North America rose 32% in the first quarter of 2023. The US is embarking on a major infrastructure drive, building out its manufacturing capacity. Manufacturing construction spending surged 62.3% y/y in March, to $147.4bn.
Significant cuts to discretionary spending at this juncture be the most effective way of lowering inflation. This in turn, if it helped to push down on Treasury yields, would stem the rapid increase in interest payments that the government is now spending to service its debt. But given how far the Federal budget deficit has widened YTD, modest cuts in discretionary spending may not suffice to convince the bond market that the debt burden is on a sustainable path.
