Timing a downturn is harder than timing the market
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In 2022, almost every economist predicted a recession would occur by early 2023 (myself included.)
Well, Q1 2023 just wrapped up, and the economy is still humming along.
It’s tough to make predictions, especially about the future.
So why have we yet to have a recession, and should we still expect to have one?
How the Economy Is Doing
It's a mix.
- The latest inflation reading had CPI at 6%, after it was above 8% from March — September of 2022
- The unemployment rate has been below 4% for a year; and is currently at 3.6%
- The yield curve has been inverted for about a year
- Natural gas and oil are around their regular prices after spiking last year
For the average person, things are humming along alright.
While there have been layoffs, particularly in the tech industry, compared to 2008 or 2020, most have remained unscathed.
Inflation dominated the news last year, but barely anyone talks about it now. That doesn't mean it's forgotten by all; the Federal Reserve is still determined to bring inflation closer to its 2% target.
Things seemed to be all good until a few weeks ago. Now, the biggest concern for individuals and businesses has been bank failures. Problems at several banks have sparked conversations of bank runs and fear. While there is no reason for panic now, more bank failures would have a negative impact.
Why A Recession Hasn't Occurred Yet
Most were expecting a recession based on a change of direction by the Federal Reserve. With inflation at 8% and the economy having its footing and coming out of lockdowns, in March 2022, the Federal Reserve announced it would end its quantitative easing phase and shift into quantitative tightening.
The two main tools the Fed would utilize were the federal funds rate and its balance sheet. For the past year, the Fed has been raising interest rates at a fast pace, going from 0% to 4.75%.
At the same time, the Fed has been unwinding its assets, but at a much slower pace.
Assets | Federal Reserve
The above graph has become one of my favorites in recent weeks. The Fed pumped excessive liquidity into the economy in 2020 and continued doing so until March 2022.
A portion of this made its way to consumers. Personal savings rose to a record rate for individuals. The below graph shows savings and savings rates indexed to 2000 dollars.
Personal SavingsandPersonal Savings Rate| Federal Reserve
Consumer spending is roughly 68% of the US GDP. Americans had so much cash and savings, they have yet to run out; Savings are still above pre-financial crisis levels.
There are two other reasons we still haven't had a recession yet. The Fed has raised interest rates by almost 5%, but it takes time for these rate increases to be felt, anywhere from 6 months to a year.
And if you look back at the graph showing assets, you'll see the second, main reason. Not only has the Fed moved slower than a turtle in decreasing assets, but it has even started increasing again! In the last two weeks, the Federal Reserve has had to pump liquidity into the economy to deal with the bank crisis.
It's hard to have a recession when the Fed has put so much money into the economy.
What to Expect For The Future
If there's one takeaway you get from this, it's that no one knows what will happen in the future.
Before discussing what to expect, it's important to remember that someone is always predicting an economic downturn — and eventually, they prove to be right. Similarly, there's always someone declaring that the economy and market are on the verge of a rebound, and once again, eventually they are proven correct.
Interest rates and their balance sheet have a tremendous impact on the economy.
I'm getting mixed signals from the Federal Reserve.
Previously, Chairman Powell stressed that bringing down inflation was their number one priority, evidenced by the rate hikes. But contrary to what he says, it appears they also want to keep the economy growing, hence the asset growth of the last two weeks.
Growing the balance sheet andbailing out every bankis kicking the can down the road. I was naive to think the Fed would be tough for once.
The Fed will raise interest rates by 25 basis points one more time to stay true to its word. But after that, they appear to be softening and will start helping those who become distressed.
This will trickle down and delay inflation from coming back to normal levels. More companies, even outside of tech, will likely have layoffs to reduce costs, but the unemployment rate is not expected to be above 4.5%.
The future is uncertain; the only thing I’m certain of is that by this summer, a good chunk of economists will becalling for a recessionby year’s end — which may or may not ever come.
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