A closely watched model, the Beveridge curve, suggests the US labor market may be on the verge of deterioration despite steady unemployment figures, with indicators like falling job vacancy rates and the jobs-workers gap signaling potential recession risks. Economists warn that even small shocks could lead to a sharp rise in unemployment, highlighting ongoing fragility in the labor market.
Despite Americans' negative sentiment and rising inflation, strong consumer spending and resilient economic data suggest the US economy is growing robustly, driven by high-income earners and pandemic savings, even as concerns about a potential recession and economic disparities persist.
Wealthy Americans in the top 10% now account for nearly half of US consumer spending, supporting the economy amid a slowdown in hiring and rising debt issues among other income groups, but this reliance on the wealthy's spending could pose risks if their economic confidence wanes.
Forecasters are optimistic about a soft landing for the U.S. economy in 2024, but signs of potential turbulence and recession risks persist. Despite easing inflation and solid consumer spending, recent indicators such as declining small business hiring plans, job cuts in manufacturing and service sectors, and soaring credit card delinquencies suggest underlying weaknesses. Additionally, corporate profit margins are shrinking, and an inverted yield curve continues to signal economic uncertainty. While the Federal Reserve anticipates rate cuts, the delayed effects of previous interest rate hikes may still impact growth, leading to a bumpy economic outlook with a 42% chance of recession.
European banking stocks are facing challenges as the boost from higher interest rates fades and recession risks increase. However, some investors believe that bank valuations are still too low, considering the dividend yield of almost 8% and the capital buffers held by these lenders. European bank shares are trading at around six times forecast earnings and at less than 70% of banks' own assessments of their asset worth. Despite improvements in profitability and solid fundamentals, investors fear lenders' profits may be impacted by bad debts. Analysts expect European banks to grow adjusted earnings per share by 25% this year and 6% in 2024. While there are concerns about credit issues, some investors see value in large-cap institutions and are adding to their positions in European banks.
US stock futures were flat on Monday night as traders await corporate earnings announcements from several Big Tech companies and consumer discretionary names, as well as new economic data. Meanwhile, LPL Financial says data from small business indicates a "short and shallow recession" in the later half of 2023.
Smaller banks play a critical role in the economy, and their distress raises the risk of a recession. The pandemic has put pressure on these banks, and regulators are urging them to maintain financial stability. However, some experts warn that the government may not be able to provide enough support to prevent a wave of bank failures.
