Over the past month, the economic narrative has finally shifted. At the annual Federal Reserve conference in Jackson Hole, Chair Powell expressed ‘greater confidence’ in the declining inflation data and the normalization of labor markets. Consequently, the financial media has started featuring a new group of experts who argue that the Fed might be acting too late. Are they right?

Answering this question is difficult under normal circumstances, but this economic cycle is far from normal. The sophisticated models designed to detect minor economic changes (e.g. Philips Curve and Beveridge Curve) have proven ineffective in the face of the abrupt changes we’ve experienced since COVID. For instance, the Index of Leading Economic Indicators, one of the most trusted models for predicting downturns, has been signaling a recession since October 2022. Despite this, the US economy has shown some of the strongest growth in decades.

So, where are we headed? The US economy has become one-dimensional, with growth driven mainly by consumer spending. The fiscal boost from government spending is largely behind us. Bank lending, excluding consumer credit, has nearly vanished. Business investment, apart from inventories, has been weak at best. Notably, inventories began to rise last quarter, and recent estimates suggest that back-to-school spending will drop nearly 7% compared to last year ($38.8B vs. $41.5B in 2023).

The VISA Momentum Index, introduced earlier this year, provides further evidence of a slowdown (values below 100 indicate contraction). Spending on discretionary items (gold line) is at its weakest point since the COVID lockdowns, while total spending (navy line) is near cycle lows.

Consumers have been more resilient than most expected (including us). However, debt-fueled
consumption is mathematically unsustainable. Recessions tend to occur when imbalances in the economy grow too large, forcing a reversion. Imbalances are growing, resilience is waning, and our ability to weather another shock is questionable. We are vulnerable but certainty remains elusive.

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