Some Thoughts on Recession Risks
Every road to a soft landing is littered by recession-fear potholes!
Investors and economists have chronically worried about an imminent recession ever since the 2020 pandemic. Persistent recession worries began with a 1970s-style inflation surge during 2021-22 when the annual CPI inflation rate rose from almost zero to 9.1% over two years! Since, recession fears have continued to be fueled by one of the most aggressive Federal Reserve tightening cycles in many decades, a major surge in long-term bond yields, an inversion in the yield curve lasting a record-setting 22 months and counting, a persistent 24-month period when the annual growth in the Leading Economic Indicator Index has been below zero, a huge collapse in fiscal stimulus from 18% of GDP to less than 4%, 16 consecutive months of annual M2 money supply growth below zero after never being negative in the post-war era, and finally, an unemployment rate which had been below 4% for 27 consecutive months (second longest in post-war history) without a recession.
In my career dating back to early-1983, I do not remember any other economic expansion with such widespread persistent recession fears. Undoubtably, this stock market has benefited from climbing a perpetual recession wall of worry which continues yet today. Although recession fears have never entirely faded during this recovery, they have eased and then intensified again as they have recently. It’s worth considering why imminent recession fears have recently spiked and whether a recession can again be avoided for the foreseeable future.
Why have recession fears recently worsened again?
Recent concerns have centered primarily on the jobs market. The growth in nonfarm payrolls have slowed in recent months to about only 1% annualized raising fears that a recession is nearing. However, monthly payroll numbers are notoriously volatile and job gains of only 1% -- as the U.S. has experienced in the last few months – has occurred about one-third of the time since 1990 during ongoing expansions. Similarly, during the last year, job creation has risen by about 1.5% -- a pace faster than 34% of the time during recoveries since 1990. Periods of relatively slow job growth during economic recoveries is not a shocking experience. Moreover, last quarter U.S. productivity growth was 2.5%. Often periods of weaker job creation have been offset by temporary increases in productivity. Indeed, in the last year, productivity growth has been around 2.5% with job creation of 1.5% -- hardly recession-like numbers.
