Expansion with firm credit and jobs, but inflation reaccelerates

This week's macro picture combines a real economy that keeps growing, a stable labor market and easy financial conditions, with one clear counterpoint: U.S. inflation is bouncing back sharply and consumer confidence remains depressed. None of the classic indicators that precede recessions is currently active.

Of the eight indicators that have historically anticipated recessions, none is switched on. The 10-year/3-month curve keeps a positive slope (73 bp), the Sahm rule reads just 0.07 pp against a 0.50 threshold, weekly jobless claims are down 8% year-on-year, business credit is growing strongly, financial conditions are easy, housing is not collapsing, and high-yield credit stress is low (277 bp). Mortgage delinquency is rising but well below the relevant threshold. Taken together, cycle-risk signals are off.

This is the weak spot. In the United States, CPI stands at 3.7% year-on-year and is accelerating +0.4 pp over three months. The PCE, the Fed's preferred gauge, is even more telling: 4.1% year-on-year after accelerating +1.2 pp in three months. In the euro area, HICP prints 2.8% year-on-year, also rising (+0.2 pp over three months). The direction is unmistakably upward on both sides of the Atlantic, with the U.S. acceleration the most notable signal of the week.

The labor market remains solid. The unemployment rate is 4.2%, down 0.1 pp over three months. Payrolls added +57,000 jobs in the month, a moderate but positive pace. The Sahm rule barely registers 0.07 pp, far from the alert threshold, and weekly jobless claims average 208,000 (four-week average), 8% below a year ago. There are no signs of labor deterioration.

Credit is flowing normally. Business credit is growing 8.0% year-on-year and consumer credit 2.1%. Delinquencies present a mixed but contained picture: mortgage delinquency is up to 1.89% (+0.12 pp over a year) and business delinquency to 1.34% (+0.05 pp), while card delinquency falls to 2.92% (−0.14 pp). Financial conditions as measured by the NFCI stand at −0.55, i.e. easy and below their historical average. Funding is not a stress point.

Activity keeps expanding. Industrial production is up 1.1% year-on-year and retail sales 6.7%, a notable consumption figure. In housing, the picture is mixed: permits fall 1.8% year-on-year but housing starts rise 3.5%. Manufacturing surveys, which lead the cycle, point to clear expansion: the Empire State at +15.6 (+4.6 over three months) and the Philly Fed at +41.4. The sharp contrast comes from consumer confidence at 44.8, down 7.4 points over a year and firmly in historically recessionary territory (below 70). There is therefore a gap between spending and industry, which are doing well, and household perceptions, which are deeply pessimistic.

No change in the month. The Fed keeps the federal funds rate at 3.63% (0 bp in one month; −0.01 pp over three months) and the ECB its deposit rate at 2.25% (0 bp in one month, though +0.25 pp over the three-month total). Both central banks are on hold.

The system is gaining liquidity. U.S. net liquidity stands at $5,917bn, up 1.8% over four weeks and 3.8% over thirteen. The Fed's balance sheet is expanding to $6,747bn (+0.6% over thirteen weeks, +1.3% year-on-year), pointing to the end of quantitative tightening. The Reverse Repo is virtually exhausted ($0.7bn), so it is no longer a liquidity lever. The Treasury account (TGA) has fallen $89bn over four weeks to $830bn, injecting liquidity into the system. M2 is growing 5.6% year-on-year. Outside the U.S. the sign is opposite: the ECB's balance sheet is down 2.8% year-on-year and the BoJ's 10.9%. On balance, domestic liquidity is a tailwind for risk assets, with the caveat that major foreign central banks are draining.

Risk appetite is full. Defensive sectors lag the market by 14.4 pp over three months (and −4.7 pp over the past month), indicating that investors are not seeking shelter (data through May 29). The most recent daily reading of the Dow/Nasdaq proxy shows the Dow advancing +3.1 pp versus the Nasdaq over three months, a hint of rotation toward more cyclical, less tech-heavy names, but with no defensive signal.

The dataset as a whole points to expansion, not to cooling or imminent recession risk. Employment is holding, credit is flowing, activity is growing, financial conditions are easy and domestic liquidity is rising, while the classic recession indicators remain off. The one relevant crack is inflation, which is clearly reaccelerating in the U.S. —especially the PCE— and also in the euro area, a factor that complicates the central banks' path. Added to this is the mismatch between an economy that spends and produces normally and consumers whose confidence sits at very low levels. It is a picture of expansion with rising inflation, not of cyclical deterioration.