A Plow Horse With Shin Splints

Our position on the economy has been that the US is headed for a recession, but we’re not quite there yet. Nothing in all the recent data reports changes our minds. Look for a recession to start in the second half of 2023, with some possibility of it starting earlier in 2023 and some possibility of a delay until early 2024. Until then, expect mediocre economic growth.

We called the recovery after the Financial Panic and Great Recession of 2008-09 the “Plow Horse Economy.” Real GDP growth averaged 2.2% annualized in the eight years after that recession ended. That was very slow by historical standards and we think it was due to a large expansion in the size and scope of government. The bigger the government, the smaller the private sector, creating slower real growth.

It’s hard to tease out the underlying pace of growth so far in the current recovery because of the nature of COVID-related shutdowns. However, it looks like real GDP growth will be roughly +0.5% in 2022 (Q4/Q4), which would be slower than any calendar year without a recession since the end of World War II. Call it a “Plow Horse with Shin Splints.”

This description of the economy might surprise some investors, particularly given Friday’s robust increase in payrolls. But we think many journalists, analysts, and investors misinterpreted the employment report, which wasn’t as strong as the headline. Yes, payrolls rose a very solid 263,000 in November. But the most important data point each month is the change in the total number of private-sector hours worked, which declined 0.2% for the month. That’s the equivalent of losing about 250,000 jobs. Total hours worked are up at a modest 1.1% annual rate in the past three months, signaling slower job growth ahead.

The Atlanta Fed’s “GDP Now” model suggests real GDP growth at a 2.8% annual rate in the fourth quarter, but we think growth is very likely going to fall short of that pace; we’re penciling in growth at only a 1.5% annual rate, instead. In particular, look for the trade sector, which was the key behind more rapid growth in the third quarter, to be a major drag on growth in the final quarter of the year.