A growing number of economists have changed their outlook for the U.S. economy from predicting a recession to foreseeing a “soft landing” where the economy continues to grow at a slower pace. An article in The Times ponders if the recession could just be an illusion. Paul Krugman, a colleague of mine, has also shifted his stance and now believes that a positive outcome is more likely than not.
There are valid reasons for this optimism. Unemployment rates remain low, inflation has decreased, reducing the need for the Federal Reserve to implement higher interest rates and cool down the economy. Consumer confidence is strong, and the stock market is performing well, creating a sense of financial security and encouraging spending. Additionally, the actions of stock investors, who are often cautious, speak volumes when they continue to invest.
Economist Mark Zandi also provides five supporting factors for the economy’s escape from a recession. These include consumers having savings from pandemic stimulus packages, businesses being reluctant to lay off employees due to talent scarcity, manageable household and business debts, low inflation expectations enabling the Federal Reserve to take a more relaxed approach, and decreasing oil prices.
However, despite these positive indicators, I maintain my prediction of an upcoming recession. If the economy manages to avoid a downturn this year, I believe it is highly likely to occur next year, which could be detrimental to President Biden’s reelection campaign and more beneficial to the opposing Republican candidate in the 2024 election.
Right or wrong, I have been consistently warning about a recession for some time now. In various articles, I have expressed concern about the looming recession and the possibility of the Federal Reserve causing it. As a non-economist, I don’t expect anyone to take my word for it. Instead, I encourage readers to examine the same data points that I am considering, which have historically proven to be reliable recession indicators. While there is a possibility of these indicators being incorrect, it is generally unwise to assume that “this time is different.”
One compelling data point to consider is the continuous decline in the Conference Board’s Leading Economic Index. This index tends to fluctuate before the overall economy does. In June, it experienced its 15th consecutive decrease, the longest streak since the 2007-08 recession. An analysis by economist David Rosenberg reveals that, on average, the Leading Economic Index starts declining 13 months before a recession and falls by 4.6 percent. By this measure, we are even deeper into the danger zone than in previous recessions, with June marking 18 months since the index peaked and a decline of 9.9 percent.
The yield curve, a component of the leading index, is also worth examining. It usually slopes upward when short-term interest rates are lower than long-term rates, indicating a healthy economy. However, when it “inverts” and slopes downward, it becomes a strong indicator of a recession. One explanation for this inversion is a combination of an aggressive Federal Reserve (reflected in high short-term rates) and pessimistic expectations of a slower economy leading to a change in the Fed’s direction (reflected in low long-term rates).
The yield curve has significantly inverted since I first raised concerns in December. In a span of several Fed rate hikes, the gap between 10-year Treasury-note yields and 3-month Treasury bill yields has nearly doubled. In fact, this year’s inversion is the largest recorded since 1982, according to FactSet data.
The Fed’s rate hikes have resulted in a 5 percentage point increase in the federal funds rate target range since March 2022. In the past, even smaller increases over longer periods have pushed the economy into a recession.
While some economists argue that these indicators have lost their predictive value, it is up to them to prove their point. Many economists still share a pessimistic outlook. According to a Bloomberg survey of 73 forecasters, the median forecast for the likelihood of a recession in the next 12 months remains at 60 percent.
Their pessimism is grounded in solid reasons. The effects of the Fed’s rate increases are experienced with a delay, meaning their full impact on the economy will be felt in the coming months. Rising interest rates have already affected home sales and put pressure on smaller banks. Retail sales, adjusted for inflation, have also declined. Additionally, there are specific factors that pose a danger to the economy, such as Russia’s embargo on Ukraine’s Black Sea ports causing a spike in wheat prices, and the resumption of student loan payments, which will force consumers to cut back on spending.
It may be easy to disregard these warnings during a time of economic prosperity, but I remain steadfast in my prediction of an impending recession.
Outlook:
According to Brett Ryan, Justin Weidner, Matthew Luzzetti, and Amy Yang of Deutsche Bank, the Federal Reserve’s Federal Open Market Committee will raise the federal funds rate by another quarter percentage point. They predict that Federal Reserve Chair Jerome Powell will emphasize the need for further evidence to be confident in taming inflation. Despite this rate increase, the Deutsche Bank team maintains its forecast that this will be the final rate hike in this cycle.
Quote of the Day:
“Just ask yourself a question: Is it possible in a democratic society for unelected central bankers to ask the government and legislators to trim the inflationary spending plans on which they were elected?” – Masaaki Shirakawa, former governor of the Bank of Japan, “Time for Change” (2023)
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