{"id":9313,"date":"2022-11-07T03:04:03","date_gmt":"2022-11-07T03:04:03","guid":{"rendered":"https:\/\/zacksim.com\/financial-professionals-insights\/?p=9313"},"modified":"2022-11-07T03:09:14","modified_gmt":"2022-11-07T03:09:14","slug":"what-to-expect-in-the-next-recession","status":"publish","type":"post","link":"https:\/\/zacksim.com\/financial-professionals-insights\/what-to-expect-in-the-next-recession\/","title":{"rendered":"What to Expect in the Next Recession"},"content":{"rendered":"\n

The U.S. economy posted two consecutive quarters of negative GDP growth in Q1 and Q2 of this year. While this technically meets the definition of a recession, a recession is not what the U.S. economy has endured.<\/p>\n\n\n\n

The National Bureau of Economic Research (NBER) \u2013 which is the body that classifies recessions \u2013 did not declare one, because they also consider a wide range of factors beyond GDP, like productivity, gains or losses in the jobs market, and wages. These non-GDP fundamentals trended positive while output plateaued, signaling the economy was not necessarily \u2018contracting\u2019 but was more \u2018holding its own.\u20191<\/sup><\/p>\n\n\n\n

Fast forward to Q3, and the U.S. economy grew by 2.6% according to last week\u2019s initial release by the U.S. Commerce Department. Many naysayers point to the fact that a surge in exports contributed the most to the third quarter\u2019s output, a temporary boost that will fade quickly, they say, and eventually, give way to the recession almost everyone is anticipating. We see this pattern a lot when sentiment is as negative as it is today \u2013 positive news gets ignored, framed as negative and\/or temporary, or dismissed as a fluke. Yes, the economy grew, but \u201cjust wait.\u201d<\/p>\n\n\n\n

Regular readers of my column know I am not suggesting the U.S. economy will certainly avoid a recession in the coming quarters. My two preferred recession indicators\u2014the 6-month growth rate for the Conference Board\u2019s Leading Economic Index and the 10-year\/3-month U.S. Treasury yield curve\u2014are essentially signaling recession conditions ahead:<\/p>\n\n\n\n

U.S. LEI 6-Month Growth Rate<\/strong><\/p>\n\n\n\n

\"\"
Source: The Conference Board2<\/sup><\/em><\/strong><\/figcaption><\/figure>\n\n\n\n

U.S. Yield Curve (10-Year Treasury Bond Yield Minus 3-Month Treasury Bond Yield)<\/strong><\/p>\n\n\n\n

\"\"
Source: Federal Reserve Bank of St. Louis3<\/sup><\/em><\/strong><\/figcaption><\/figure>\n\n\n\n

Where I differ from the mainstream is in assessing what the next recession could look like. Investors may hear in the news that massive layoffs are coming, the housing market is poised to implode, inflation and interest rates are heading higher, and all of this means we would be wise to prepare for an \u201ceconomic hurricane.\u201d The follow-on implication is usually that stocks have lower to go.<\/p>\n\n\n\n

But in my view, these gloomy outlooks all make the same cognitive error that we see a lot in behavioral economics: recency bias<\/em>. Memories of recent events \u2013 or in this case, recent recessions \u2013 will cause investors and economists to assume that the next recession will look like the last one. But that\u2019s not always the case, and in fact, is rarely the case.<\/p>\n\n\n\n

According to the National Bureau of Economic Research, there have been 34 recessions in the U.S. since 1857, and they have ranged from lasting two months to over 5 years \u2013 and everything in between. Sometimes unemployment goes up by a lot, sometimes it doesn\u2019t. Sometimes output falls off a cliff, but other times the U.S. economy experiences a contraction so mild and quick that few people outside of the financial profession even notice.<\/p>\n\n\n\n

Because the housing market is weakening, job openings are falling, and inflation and interest rates remain elevated, some assume that the U.S. economy could be headed for another Great Recession, on par with what we experienced from late 2007 to 2009. But that\u2019s just recency bias at work, in my view. <\/p>\n\n\n\n

I see far more signs that the U.S. could experience a mild recession versus a severe one \u2013 a so-called economic soft landing. In the latest GDP print, consumer spending \u2013 which accounts for close to two-thirds of total economic activity \u2013 edged higher, underscoring the U.S. consumers\u2019 resilience in the face of rising inflation. Another key metric that measures underlying demand in the economy, called the final sales to private domestic purchasers, moved 0.1% higher in Q3 as compared to Q2. Banks\u2019 balance sheets remain healthy, and the legacy of low-interest rates is keeping debt service costs historically low for a majority of Americans. There are also still more open jobs than there are unemployed Americans, a condition you do not see in economic hard times.<\/p>\n\n\n\n

Economic conditions look nothing like they did during the Great Recession or leading up to it, and I seriously doubt they ever will in this cycle.<\/p>\n\n\n\n

Bottom Line for Investors<\/strong><\/p>\n\n\n\n

Historically, recessions are best characterized by a decline in production and output, a rupture in the credit markets and household finances, and some amount of job loss. As I write, we have not seen any meaningful sign of these negative factors appearing yet.<\/p>\n\n\n\n

That is not to say the U.S. economy will avoid recession. Leading economic indicators point to a weaker economy if not now, soon. But that does not mean the next recession has to be a severe one, where unemployment rises to double-digits as it did during the pandemic and also during the Great Recession. Economic contractions can take many forms, and investors should remember that the next one is not likely to look like the last one.<\/p>\n","protected":false},"excerpt":{"rendered":"

A recession is definitely possible in the months ahead, but Mitch discusses whether it will be an “economic hurricane” or a “soft landing” <\/p>\n","protected":false},"author":4,"featured_media":0,"comment_status":"closed","ping_status":"closed","sticky":false,"template":"","format":"standard","meta":{"footnotes":""},"categories":[181,1],"tags":[],"class_list":["post-9313","post","type-post","status-publish","format-standard","hentry","category-financial-professionals","category-mitch-on-the-markets"],"acf":[],"_links":{"self":[{"href":"https:\/\/zacksim.com\/financial-professionals-insights\/wp-json\/wp\/v2\/posts\/9313","targetHints":{"allow":["GET"]}}],"collection":[{"href":"https:\/\/zacksim.com\/financial-professionals-insights\/wp-json\/wp\/v2\/posts"}],"about":[{"href":"https:\/\/zacksim.com\/financial-professionals-insights\/wp-json\/wp\/v2\/types\/post"}],"author":[{"embeddable":true,"href":"https:\/\/zacksim.com\/financial-professionals-insights\/wp-json\/wp\/v2\/users\/4"}],"replies":[{"embeddable":true,"href":"https:\/\/zacksim.com\/financial-professionals-insights\/wp-json\/wp\/v2\/comments?post=9313"}],"version-history":[{"count":3,"href":"https:\/\/zacksim.com\/financial-professionals-insights\/wp-json\/wp\/v2\/posts\/9313\/revisions"}],"predecessor-version":[{"id":9320,"href":"https:\/\/zacksim.com\/financial-professionals-insights\/wp-json\/wp\/v2\/posts\/9313\/revisions\/9320"}],"wp:attachment":[{"href":"https:\/\/zacksim.com\/financial-professionals-insights\/wp-json\/wp\/v2\/media?parent=9313"}],"wp:term":[{"taxonomy":"category","embeddable":true,"href":"https:\/\/zacksim.com\/financial-professionals-insights\/wp-json\/wp\/v2\/categories?post=9313"},{"taxonomy":"post_tag","embeddable":true,"href":"https:\/\/zacksim.com\/financial-professionals-insights\/wp-json\/wp\/v2\/tags?post=9313"}],"curies":[{"name":"wp","href":"https:\/\/api.w.org\/{rel}","templated":true}]}}