Slowing But Growing: Why The U.S. Isn’t Headed For Recession | Prometheus Research

Episode Summary

Executive Summary: Ahan of Prometheus Macro argues that the U.S. economy is slowing but not in recession, using a systematic framework built around growth, inflation, and liquidity. He says consumption and profits remain strong, manufacturing is the main weak spot, inflation should keep easing, and liquidity remains supportive despite QT. His preferred portfolio is modestly long stocks and bonds and short commodities.

Main Topics: Systematic macro investing framework (Priority: 5/5): Ahan explains why Prometheus Macro uses a systematic process rather than discretionary calls: test economic views across many regimes, codify them, and quantify confidence before trading. Growth and GDP nowcasting (Priority: 5/5): He walks through a GDP nowcast framework using consumption, investment, government spending, and trade, arguing that aggregate growth is still resilient even though some components have softened. Corporate profits and household demand (Priority: 4/5): He links GDP to corporate top-line growth and shows that consumer spending remains the main support for profits, making an immediate earnings collapse unlikely. Manufacturing weakness and cyclicality (Priority: 5/5): Manufacturing is the clearest soft patch: sales, production, orders, capacity utilization, and employment are weak, pressuring profits and weighing on overall growth without necessarily causing recession. Labor market and recession probability (Priority: 4/5): He argues labor-market data are not consistent with a broad recession, and that recession models should use a full mosaic of indicators rather than a single series like job openings or claims. Inflation outlook (Priority: 3/5): Inflation is improving and likely to keep easing as transportation and shelter pressures cool, though he does not expect a return to 1% inflation. Liquidity and portfolio positioning (Priority: 5/5): He defines liquidity through balance-sheet capacity across the Fed, Treasury, corporates, and intermediaries, and says the current setup supports a slowing-but-growing environment favoring stocks and bonds over commodities.

Key Arguments: Systematic macro is superior to pure discretion because it tests economic views across many historical regimes, reducing overconfidence and improving confidence calibration. Macro can be reduced to three core variables—growth, inflation, and liquidity—which together capture the main environment for markets. GDP is often dismissed as lagging, but a high-frequency nowcast built from GDP components provides a timely and comprehensive measure of current growth. Consumption is still strong across its subcomponents, and a recession would require another GDP component to offset that strength meaningfully. Investment is weakening but not collapsing; recessionary declines usually require a more severe drop in construction and equipment spending. Government spending is contributing positively, but the narrative of fiscal dominance is overstated because much of the support comes from prior stimulus and balance-sheet effects rather than ongoing direct GDP prop-up. Interest expense shows up on the income side of national accounts, so rising government interest costs do not map cleanly into the GDP spending component. Corporate profits are being supported mainly by household spending and still-healthy consumer demand, so fading earnings requires fighting a strong consumer. Manufacturing is the biggest cyclical weakness: higher wages, weak output, weak orders, and weak production are squeezing profits and may force layoffs. Labor-market concerns should be judged in the context of the full business cycle; isolated indicators like JOLTS are too narrow and noisy to define recession risk. Inflation should continue to drift lower because transportation and shelter are easing, with CPI likely settling around the mid-2% range rather than reaccelerating sharply. Liquidity should be measured via the combined balance-sheet capacity of the Fed, Treasury, corporates, and intermediaries, not just a simplistic Fed-liquidity label. Despite QT, reserve balances have stayed resilient because the Fed’s RRP facility has been drained and money has flowed into private repo and T-bills, supporting market liquidity. The best portfolio expression of the current environment is modestly long stocks and bonds and short commodities, reflecting slower growth, easing inflation, and manufacturing stress.

Data Points: Real GDP nowcast: about 2.1% - Ahan’s monthly estimate of real GDP growth at the time of the discussion. GDP deflator nowcast: about 0.07% - Monthly estimate used alongside real GDP to approximate nominal GDP. Nominal GDP growth: roughly 2.1% + 0.07% ≈ elevated versus recent history - He says nominal GDP remains high relative to recent history, though off earlier peaks near 6%. Current recession probability: 11% to 15% - Prometheus Macro’s estimate of recession odds based on its systematic framework. Growth-supporting government spending contribution: about 40 bps - Government spending’s contribution to current GDP growth. Positive GDP diffusion score: 64% to 65% of 75 components rising - Broad diffusion across GDP subcomponents, which he says is inconsistent with an archetypal recession. Consumer spending share of profits support: largest current support - Household spending is the main driver of corporate profit growth in the current cycle. Manufacturing profits: significantly negative - Monthly estimate of manufacturing-sector profits relative to official reported numbers. Portfolio performance: up over 11% in the last quarter - A portfolio long stocks and bonds and short commodities, according to his example. Inflation target outlook: roughly 2.5% range - His expected steady-state inflation zone rather than a return to 1% or a new inflation surge. Fed policy move referenced: 50 bps cut - Recent cut mentioned in the context of renewed inflation concerns. Manufacturing wage pressure: wage costs absorbing almost all top line - He describes manufacturing firms as facing wage inflation that is squeezing profitability.

Pivotal Quotes: "macro is really centered around three big variables growth inflation and liquidity" — Ahan: He defines the core of his systematic macro framework early in the interview. "you have to look at the broader tapestry of what's going on" — Ahan: His rebuttal to relying on a single recession indicator such as JOLTS or jobless claims. "the best you know kind of risk reward for this environment at this point in time is being modestly long stocks and bonds and short commodities" — Ahan: His final portfolio recommendation based on slowing growth, easing inflation, and manufacturing weakness.

Implications: Listeners should expect a slowdown, not an immediate recession, with inflation easing and liquidity still supportive. The macro trade he favors is stocks and bonds over commodities, but he stresses that the setup can change quickly as data evolves.