• A recession has been avoided so far for three key reasons, economist David Rosenberg said. 
  • Low levels of debt refinancing have blunted the impact of Fed rate hikes. 
  • Meanwhile, consumers are still spending as the "wealth effect" keeps Americans feeling confident. 

The US has avoided a long-called-for recession for three reasons, but it doesn't mean a near-term downturn has been taken off the table, according to economist David Rosenberg.  

"Well, no asset class is priced for a recession — in fact, the corporate bond market and the S&P 500 now have zero chance of an economic downturn being discounted. Nothing is ever 0%, and nothing is ever 100%, but the current level of complacency is definitely unsettling," Rosenberg said in a note on Wednesday.

Taking a step back, besides higher-than-expected inflation, unemployment is going down, particularly in the state and local government sectors. Non-education employment is seeing the fastest growth rate since the late 1970s, and construction expenditures are up by 17% year over year. 

Such a booming landscape doesn't make Rosenberg drop his recession call, but he said there are three reasons the US has been able to navigate the uncertainty so far. 

First, he highlighted the historically low levels of debt refinancing in 2020 and 2021, which have so far prevented the Fed's aggressive tightening measures from being fully felt in the broader economy. 

"This made the economy less sensitive to the interest rate shift, to be sure, but that only bought time. In the next three years, especially in the business sector, it is going to be time to 'pay the piper' as an epic $7 trillion of corporate debt will be refinanced and likely at much higher interest rates than at the time of origination," he said.

Second, Rosenberg said that the government's spending via the Inflation Reduction Act and the CHIPS and Science Act has propelled manufacturing facility construction by 32%, even while industrial production has been stagnant.

"The bull market in economic growth boils down to the heavy hand and generosity of Uncle Sam," he said in the note. 

The third factor supporting his argument is the expansion of consumer spending, boosted by the "wealth effect" of rising real estate prices. Rosenberg notes that personal savings rates are now less than half the pre-pandemic norm as Americans keep spending. 

"The boom in real estate and equities has pushed the level of household net worth up an incredible $11.6 trillion (+8%) over the past year, and this stash of wealth has encouraged consumers to spend more and more out of current income. Highly reminiscent of what happened in the late 1990s," he added. 

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