Is the market currently overestimating the expectations of a U.S. recession?
Morgan Stanley believes that the market's panic over a U.S. recession is exaggerated, and the real economic slowdown has not fully manifested. Although the market's assessment of an economic slowdown is correct, the reasoning may be flawed, and investors should focus on hard data rather than soft data. Recent hard data, such as industrial production and retail sales, indicate that the U.S. economy is not in recession. Morgan Stanley points out that a meaningful slowdown may occur in the next quarter, while immigration factors are underestimated, and the market's expectations for deregulation are overly high
Morgan Stanley believes that the market's panic over a U.S. recession is likely exaggerated, and the true economic slowdown has not yet fully manifested.
Last week, the Federal Reserve announced its latest interest rate decision, with the dot plot largely aligning with its U.S. economists' expectations of slowing growth and rising inflation. Morgan Stanley believes that the market's assessment of a U.S. economic slowdown is correct, but the reasoning may be flawed. The true economic slowdown has not yet fully appeared in hard data. 
Morgan Stanley points out that the U.S. economy is currently just in a period of stagnation, and significant uncertainty has yet to arrive, while investors should focus on hard data rather than soft data. In the economic and financial fields, hard data refers to quantifiable, objective economic indicators, while soft data refers to subjective information that is difficult to quantify, such as consumer confidence and market sentiment. Recent hard data, such as industrial production index, retail sales, and non-farm payrolls, indicate that the U.S. economy is not yet in a recession.
The retail sales data for January scared many investors, but the data for February released last week showed that these concerns were exaggerated. Morgan Stanley stated:
A meaningful slowdown may not appear for another quarter, and we will be paying closer attention to non-farm employment data than usual.
The Market May Underestimate Immigration Factors
Morgan Stanley stated that four policy levers are shaping the market's view of the economy this year: tariffs, fiscal policy, immigration, and deregulation.
The news related to tariffs and fiscal policy indicates that recent risks are increasingly skewed to the downside—tariffs are being implemented faster and are broader in scope, with April 2 now being the focus. Fiscal policy is no longer considered a neutral factor as some spending has been paused and layoffs are spreading, meaning fiscal policy is now contractionary.
It is noteworthy that in the past few weeks, the other two policies have not brought any new information, but Morgan Stanley still believes that immigration is an underestimated factor for the economy, and that the market has greatly overestimated the potential speed of deregulation and its ability to drive growth.
Risk Warning and Disclaimer
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