Investors, economists and journalists have been talking incessantly about recession for the better part of the past year, and they’re all tired of it. Everyone would like to make a clean break from 2022 and move on to another story. Unfortunately, it’s unclear whether reality plans to cooperate, and there’s a growing risk that collective jadedness with recession chatter may cloud our judgment about the real and continuing threat of a downturn.
Understandably so. The word “recession” appeared in more than 650,000 news headlines last year, with peak hysteria in July. At the time, many people speculated that the US was already in a recession. Although it wasn’t, we then spent the rest of the year talking about how one was still in the offing; unemployment was poised to rise; home prices were set to fall; and the S&P 500 Index could dip as low as 3,000. It was so much gloom that bearishness became passé. After 12 months of relentless pessimism, none of these forecasts has come to pass, so surely the histrionics are misplaced, some will reason.
Markets even took a turn for the better this month amid all the warm and fuzzy new year vibes. But is any of this optimism to be trusted, or are we simply reaching for a new narrative to break up the monotony? Are we simply ... bored? If an investor parachuted into 2023 without ever having endured 2022, could this market possibly be a buy?
Consider the long history of pre-recession rebounds in financial markets. Traders have often marshaled one last big S&P 500 bounce — one final hurrah — before they sensed that the economy was really, truly going to pieces. At the time of said rally, the Federal Reserve was often winding down a campaign of interest rate increases, but it was still too early to see the full consequences (sound familiar?)
Even economists are susceptible to a few final flashes of misplaced late-cycle optimism. There’s often a slight tick downward in the Survey of Professional Forecasters’ probability of an imminent recession right before or just as the economy is starting to contract.
- In the late 1980s, economists worried routinely about recession but actually became a bit more optimistic before one began in mid-1990.
- The year 1999 featured regular debate about recession, which then cooled off before one commenced in March 2001. Even during the recession, there was a quarter of improving sentiment, and it wasn’t until the terrorist attacks of Sept. 11, 2001, that everyone saw the full picture.
- Likewise, there was plenty of discussion about recession in late 2006, but then some economists confused “being early” for “being wrong” and briefly cut their recession odds in early 2007. Again here, there was a slight downtick in economists’ recession odds even after one had begun, until the collapse of Lehman Brothers erased any lingering doubt.
Now return to the present day. The worst bout of inflation in four decades is ebbing, and investors are actively gaming out the end of Fed rate increases. The savings cushions that households accumulated during the Covid-19 pandemic remain sizable, while unemployment is still at a 50-year low. As in the past, the optimists have plenty to sink their teeth into, and no sign of a massive new shock — certainly no Lehman — to validate their fears.
But the bears have history on their side. Rarely has the Fed managed to raise interest rates without sending the economy off a cliff, so it’s hard to believe that it can pull off such a feat while moving at the fastest pace in modern times. Adding to those concerns, the Institute for Supply Management’s gauges of manufacturing and services activity have both moved into contractionary territory; retail sales have declined in two consecutive monthly reports; and home sales are plummeting.
It’s tempting to cling to theories about why this time might be different. Maybe the “long and variable lags” of monetary policy no longer apply to the same extent. Maybe the strength of household balance sheets will sustain the economy. Everyone is sick of the negativity, after all. But there’s still a good chance that our first impression about this economy — that bad feeling from early 2022 — was right all along, and we have to resist the urge to change our minds simply because we’re weary of the same old story.
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