A matter of when, not if
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Without any facts to back me up, I’d argue the average person’s attention span has decreased in the past decade. A few months ago, markets were in free fall and an impending recession seemed imminent. Now, after a slight rebound, not so much.
But a recession is still on the horizon (if not here already). Some indicators still show the economy is solid, but these are likely to deteriorate in the coming months.
The market rebound has been nice, but I would not count out another decline. And for the economy itself, it seems more likely to run into problems than prosper in the short term.
Recession Fear
Just like the fear of a recession hit the public in late March — April 2020, people were captured by fear in June of this year. In June, markets bottomed and people searched “Recession” the most in any month.
Google Trends
As markets rebounded in July, worry over a recession slipped away. Funny enough, we had our worst CPI and PPI data released in July (reporting for June), but most seemed to believe the worst is in the past.
The news industry is shortsighted and reactionary.
A few months ago, everyone was screaming recession. But now all is good?
One recession indicator that got attention months ago was the yield curve. It inverted in early April, drawing headlines. It then rebounded but has since inverted in July. And it has stayed inverted, but no one seems to pay it any mind.
FRED
Where the Economy Stands
The Federal Reserve has raised interest rates by 2.5% in less than five months.
The higher the interest rates, the more likely a recession. But the lower the interest rates, the more likely inflation stays high. The Fed has declared inflation their number one priority, even if the economy slips into a recession.
The immediate impact of rate rises has been on financial markets. Stocks fell by 20% at one point. Mortgage rates have risen from 3% to 6%.
What a Recession Will Look Like
Of a group of CEOs polled, 81% said they were preparing for a recession.
But, the vast majority of those CEOs expect the downturn to be brief and shallow.
We’ve already seen the stock market rebound from its low. Investors are starting to believe the Federal Reserve is close to its desired interest rate level. The Fed’s September meeting (September 21–22) will be impactful on the market. A 0.75% increase is not out of the question, but 0.50% is what is widely expected.
While stock (and crypto) prices have rebounded, they may not be out of the clear just yet. There is still a strong possibility prices will fall again. Whether or not the mid-June bottom will stay the bottom or prices will fall below that remains to be seen.
The increase in mortgage rates has slowed down housing activity. Builder sentiment indicates that we are already in a housing recession. While we are not yet in a housing recession, prices have fallen. Unfortunately, the rising mortgage rates partially offset the decreased prices for buyers. It seems safe to say that the days of all cash offers for 20% above the asking price are behind us.
One interesting part of the economy is the labor market. The latest GDP reading indicates we are in a recession. But the unemployment rate, at 3.5%, is still near record lows. The worrying aspect is that there have been several occasions where the unemployment rate was very low before a recession occurred.
While it is not expected for the unemployment rate to hit double digits, it should increase from where it currently is. Companies have likely learned from the 2020 downturn — they know it is difficult replacing talent so they will not have massive layoffs. My honest expectation is for the unemployment rate to increase to about 6% in a near downturn.
There is a narrow path to avoiding a recession. I don’t think it’s possible. The Federal Reserve has barely seen the impact of rate increases they are hoping for. It takes about 3–6 months after a rates increase to see its impact. With more increases coming this year, it could lead to a recession in 2023, albeit one that isn’t expected to be too deep.
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