Where Is The Recession?

Where is this recession we keep hearing about? For the past year, many economists and investment strategists said it was right around the corner. But its shadow has crept steadily backward. US economic growth slowed to 2.1% last year following an abnormal surge of more than 5% in 2021. But we haven’t yet seen a contraction. Certainly some signs point to an economic downturn. The Fed has raised interest rates by a magnitude and pace greater than at any time in the last 40 years. Manufacturing and housing market activity surveys indicate a slowdown. Some trading patterns in the bond market suggest bearishness. But on the other hand, despite some high profile layoff announcements, unemployment remains very low and consumer spending is holding up reasonably well. We’re told corporate and household balance sheets are solid.

Bloomberg ran an article yesterday highlighting the fact that a lot of data we investors traditionally monitor are sending contradictory messages. The article quotes former Federal Reserve economist Claudia Sahm, who says, “The signals are mixed in a way that we haven’t seen before. People say, ‘Historically when this happens, that happens, and then we go into a recession.’ That’s a good starting place, but that shouldn’t be the end place for the analysis.” She prefers to look at unemployment, which as I mentioned is not yet flashing warning signs.

And by the way, the stock market doesn’t seem to believe recession is right around the corner. Since bottoming last October, US indexes are up more than 10%. The Wall Street Journal has this to say about that: “So far in 2023, many traders and portfolio managers appear satisfied that economic activity remains strong enough that a recession this year is far from certain. That conclusion, together with cooling inflation readings, has helped fuel a modest rebound in U.S. stock indexes following last year’s washout.” Could it be that this “washout” has more to do with resetting stock/bond/housing valuations than with predicting an economic downturn?