US economy – soft landing or crash landing?

Significant cooling, ...

The US economy is showing signs of a significant slowdown. The purchasing managers' indices compiled by ISM were particularly striking. The index for manufacturing fell for the third time in a row in June and, at 48.5, is below the neutral threshold of 50. The services index even slipped by 5 points to 48.8 in June, a four-year low (title chart). Hard data, particularly from the residential construction sector, are also tending towards weakness at present. Is the US economy in for a rude awakening?

... which is what the doctor ordered

This interpretation seems premature to us. After all, the slowdown in economic momentum can hardly come as a surprise. Instead, the Fed's rate hikes were aimed precisely at cooling the economy and thereby bringing inflation back under control. At the same time, the boost the economy received from fiscal policy is tending to wane, even if fiscal consolidation is out of the question. In response to this, a significant slowdown has recently been observed in some areas of investment. This applies in particular to residential construction, which is being held back by persistently high mortgage interest rates, and commercial construction. The boom in the construction of new factories (e.g. for chips), which was fueled by various government subsidies, has come to an end.

Financial conditions have improved again ...

By contrast, investments in equipment and intellectual property such as software are very robust. The artificial intelligence mega-trend could play a positive role here. In addition, financing conditions have actually improved over the past year, despite the relatively high key interest rates. This is also shown by the Chicago Fed's broad index of national financial conditions, which summarizes around 100 indicators such as risk premiums, bank lending conditions, market volatility and stock market performance (Chart 1). According to this index, companies should continue to have no problems raising capital. This is likely to have contributed to the fact that growth rates of 9% for equipment and 5% for intellectual property (both at an annual rate from the previous quarter) are emerging for the second quarter.

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