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The risk of a recession is not zero

by xyonent
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As Recently discussed Wall Street economists are increasingly convinced that the risk of a recession has plummeted.

economist He doesn’t think the economy is approaching a recession: In January he predicted growth would average less than 1% for the first three quarters of the year. They now expect growth this year to bottom out at an inflation-adjusted 1.4 percent in the third quarter.” – The Wall Street Journal

Of course, this outlook seems at odds with many indicators that have long signaled recessions, such as an inversion of the yield curve. As the chart shows, we are currently in the longest and most persistent period of inversion between the 10-year and 3-month Treasury yields on record. But this time, no recession has emerged.

Another historically reliable indicator of recession is the six-month percentage change in leading economic indicators. Like yield curve inversions, the depth and duration of negative developments in leading economic indicators have always been consistent with a recession. However, the US has once again avoided such an outcome.

Of course, the Federal Reserve tightened monetary policy through an aggressive interest rate hike campaign, but it failed to push the economy into recession.

Given that the economy has remained strong despite recession predictions, economists “Resigned” I’m hoping for one.

But has the risk of a recession gone?

The risk of a recession is not zero

There are some very funny memes circulating on social media. Sure, cute, cuddly animals seem safe, but… “The risk of them killing you is low, but it’s never zero.”

This seems like an appropriate meme, given that the risk of an economic recession may be low at the moment, but it’s not zero.

As Previously discussedOne of the main reasons the economy has resisted the triggering of a recession from rising borrowing costs has been the ample supply of fiscal support provided by previously passed spending bills and other measures. Inflation Control Law And that CHIPs Act. Combined with stimulus checks, tax credits and payment deferrals on a variety of debts, including rent and student loans, the amount of financial support given to consumption helped support economic growth as the Federal Reserve tightened monetary policy.

The important thing to understand is that the surge in financial support “Adrenaline” Revitalizing the economy. To be sure, many economic data points to a growing risk of recession. But as the economic growth of 2021 has shown, the surge in monetary policy has boosted the economy.

The important thing to understand, and what most economists fail to understand, is that as the economy slows “Adrenaline” The stimulus effect is fading: if the economy had grown at 5% nominal, as it did in 2019, the post-pandemic fall from the peak would have already marked a recession. But with nominal growth approaching 18%, it will take much longer than usual for growth to recover below zero. To show this, we looked at the number of quarters between a peak in economic activity and the start of a recession. Using this historical analysis, we can estimate that it takes about 22 quarters for economic growth to reverse into a recession. The next recession will occur between late 2025 and mid-2026.

Of course, there are many factors that could make this estimated period longer or shorter, but the key point is that it could take much longer than usual for growth to reverse from a high rate of economic growth, as compared to the 25 quarters of slowing growth that preceded the 1991 recession.

For investors, the consensus among economists is that the risk of a recession is very low, but not zero.

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Notable economic data

With such a long lag between recessionary indicators and economic downturns, it’s no wonder economists have given up on predicting recessions. But just because a recession hasn’t happened yet doesn’t mean it won’t happen in the future. Pay particular attention to data that has historically correlated with economic growth.

For example, real retail sales have weakened significantly since the peak of economic activity in 2021. As the figure shows, retail sales account for roughly 40% of personal consumption expenditures (PCE). Therefore, it is not surprising that retail sales lead changes in PCE. The importance of this lead is that PCE accounts for roughly 70% of the GDP calculation. Thus, when consumer demand slows, the economy slows and inflation falls. With consumer surplus savings running dry, real retail sales are now negative, which could lead to further slowdown in economic growth in coming quarters.

Of course, without jobs, it is difficult to further increase economic consumption. Especially since part-time jobs also count, but those jobs do not offer the wages or benefits of full-time employment to support a family. Not surprisingly, a key leading indicator of every previous recession has been a reversal of full-time employment.

While additional monetary and fiscal support could certainly avert a recession, government and corporate investment accounts for a much smaller share of GDP than consumer spending. “Bad news is good news” As consumers struggle with declining wage growth and rising living costs, their ability to borrow to cover the difference is becoming more difficult.

“As a result of their stagnant incomes, they are the first to reach the threshold where they can take on additional debt.”

Keep an eye on upcoming economic data. Although it may take much longer than many expect, the risk of a recession appears to be greater than zero.

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2024/05/24

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