Recession Or No Recession?
What's the deal?
The recession talk has returned. Last week as the stock market suffered its first major pullback of the year, the media set their sights back onto the fears of a recession.
This led people to search about a recession for themselves. As you can see below the Google searches for recession spiked.
So are we in a recession? Is it close? What’s the deal?
Let’s take a look.
First off, the probability of a recession is still quite low. JP Morgan raised its odds last week from 25% to 35%.
Goldman Sachs has the odds of a recession in the next year up to 41%. In April it was at 29%.
Even if the odds are still quite low, the probability of a recession has increased. That should be expected as it’s clear that the economy has been slowing. I’m just not so sure that justifies all the loud talk about a looming recession.
We’ve heard about unemployment rising. There is no question that it has had an uptick. That’s probably been one of the biggest recession reasons that we hear. But there is a piece of that which hasn’t fully been discussed.
Matthew Klein points out that the rise in unemployment isn’t being driven by permanent layoffs.
Here is another good chart showing the breakdown by reasons and where the trend is versus the past few years. Nothing alarming in this chart.
The rate of permanent layoffs in the US still remains historically low.
Then Seth Golden made an excellent point on the unemployment rate. This is spot on analysis, which I completely agree with.
I don't worry about the labor market's Unemployment Rate rate when I see manufacturing and construction job growth up-trending. When it is downtrending and Unemployment Rate is rising, then I start to worry.
The other area of the economy that is being overlooked is as the labor market tightens and the economy slows, we know the Fed is going to cut interest rates. Rate cuts are coming.
That’s great news on the flip side for lending. Banks will no longer be raising interest rates on loans. Those rates will come down, therefore loan demand should pick up.
In fact, loan demand is already seeing stronger demand.
The 30-year mortgage rate has continued to drop. It now sits at 6.4%. That’s the lowest level since May 2023. A 15 month low.
This area of the market has been frozen for a while. The lower rates would likely unlock refinances, HELOCs and home purchases. Thus providing a big economic boost.
The other most talked about piece of why a recession is imminent is credit card debt. This topic has been talked about since 2022. Yes, credit card debt is high. But people have more money now than ever and everything costs much more, so the spend and balances will automatically be higher. It offsets itself.
It’s also as simple as what Eric Wallerstein points out in his chart.
Credit card debt represents just 6.4% of total household debt. Mortgages are 70%. Worth keeping in mind when you think about consumer balance sheets, which look much healthier than pre-pandemic.
Then I love this simple commentary from Torsten Slock on his chart.
If the economy were crashing, default rates would be spiking higher, and that is not what the data shows.
If a recession was here or imminent wouldn’t you think that companies would be mentioning this on their earnings calls?
They’re not. The mentions on earnings calls are at the lowest levels since 2021.
Then we have to remember the technical definition of a recession.
A recession is defined as having two consecutive quarters of negative GDP growth.
Let’s take a look at that. Did you know that the US economy grew at a faster than expected pace in Q2? Try the third best quarter of GDP growth since Q4 2021.
When you talk employment, small business is your engine. Yesterday was the best NFIB Small Business Outlook results since April 2022. This is the highest small business optimism has been in over 2 years.
It’s clear some things are slowing. But slowing doesn’t automatically bring the need to pull the recession alarm.
There is a lot of speculation that a recession is imminent. It seems that some badly want a recession to happen. They keep telling us it’s going to happen. Those same people have been calling for one since 2022.
The bottom line is that the data just doesn’t currently support or point to a recession.
It might be coming, it might not. Nobody knows.
The Coffee Table ☕
I liked Elliott Appel’s post called 7 Factors to Choose the Best Retirement Location. This is a perfect thing to read and use as a tool if you’re in or nearing this point in your life.
This was a good piece on umbrella insurance in the WSJ. Umbrella Insurance Covers Worst-Case Scenarios. There Are Now More of Them.
This visual shows how many Fortune 500 companies are headquartered in each state. There are 8 here in Wisconsin. How many are in your state?
Source: Visual Capitalist
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