Zacks Investment Management

Chelsea C. from Lexington, KY asks: Hi Mitch, my question is about a recession in the U.S. I’ve been hearing calls for a recession for over a year now, and it still hasn’t arrived. What’s the deal? Has everyone just been dead wrong, or is it just a matter of time now? Thank you for your time.

Mitch’s Response:

Thanks for writing! In my columns to date, I’ve also hinted at the probability of recession, which the U.S. economy has continued to defy. There is still not a sure answer to your question, but I do think from an investment and equity markets standpoint, stocks have already priced in weakness at least from the standpoint of falling corporate earnings – which we think is close to running its course.

In short, the U.S. economy may, or may not, enter a recession later this year or early next. But it also may not matter to the stock market. As long as any economic downturn is in line with or better than expectations – and not worse – then I do not see a big negative surprise in the cards for stocks.¹

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You mention hearing calls for a recession for over a year now, which is another reason I doubt we’ll see much stock market impact. This ‘looming downturn’ has arguably been one of the most anticipated recessions in modern history. Indeed, at the end of last year, 43.5% of surveyed economists (as per Federal Reserve Bank of Philadelphia) expected a recession sometime in 2023, the highest percentage on record dating back more than 50 years.

Economists have been changing their minds of late. As of June 30, the percentage of those expecting a recession in the next 12 months dropped to 31.75%. As you can see in the chart below, an increasing number of forecasts have shifted to flat or very modest growth in 2023:

Source: Federal Reserve Bank of Philadelphia³

There have been a few reasons the U.S. economy continues to chug along. The first is the labor market, which has been less sensitive to interest rate increases than just about everyone thought. While there have been waves of layoffs in the technology sector and among a few select white-collar jobs in the ‘knowledge economy,’ the overall jobs market remains one where job openings far outstrip the number of Americans looking for work. The unemployment rate remains below 4%.

Another key driver keeping the U.S. economy, and specifically the U.S. consumer, afloat has been falling energy prices. The war in Ukraine led to a spike globally in oil and natural gas prices, which placed pressure on producers and consumers alike. Had those high prices been sustained, eventually the effects of inflation would have substantially dented production and spending. But those high prices turned out to be fleeting.

Looking out from here, there is still a strong recession signal being sent by one of the most reliable leading indicators available: the yield curve. As seen on the chart below, a yield curve inversion (circled in red) has preceded each of the last few recessions. In fact, since 1966, an inverted yield curve has preceded all eight recessions that have taken place.

Source: Federal Reserve Bank of St. Louis⁴

It seems improbable, in my view, that the U.S. would be able to elude a modest downturn with these lending conditions in place. But then again, the jobs market and consumer spending strength may continue to surprise us.

There is no way to know exactly when or if a recession will occur, but you can prepare for one.

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Disclosure