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Investing.com-- Recent GDP revisions and resilient consumer spending have eased some fears about the pace of the downturn, but the worst may not be over, economists at Morgan Stanley warned, flagging deep-seated risks including tariff-induced uncertainty on capex and margins as well as pressure on global manufacturing.
“Recent data have made clear that consumer spending has not yet slowed materially, and Q2 GDP was revised up. Morever, even though firms have come close to stopping hiring, there has not been a pickup in firings, and that outcome is usually a precursor of a recession. Are we past the worst? We do not think so, but the evidence especially from spending is not so clear yet that the market has to reject its constructive stance,” Morgan Stanley’s global economics team said in a recent report.
The weakening labor market is a key source of concern for the economists, with job growth now less than half its pace from last year and labor income close to zero in real terms. While trade numbers have stayed resilient underpinned by boosts from gold, IT hardware, and pharmaceuticals, these sectoral strengths are likely temporary, they added.
Global trade frictions and high tariffs, meanwhile continue to weigh on exports and manufacturing, especially in China, Japan, and Europe, where PMIs have turned down after a brief improvement. Even in the US, the lagged effects of slower labor income are expected to dampen growth in coming quarters despite solid headline figures.
Despite a constructive market tone, Morgan Stanley flags mounting downside risks and expects a further slowdown in the US and abroad, even if recession is not the most likely outcome right now.