Right now, it’s not looking likely
By Joe Higgins, Quest 4 Quality
For the past two years, economists and banks have been predicting an imminent recession and for the past two years, they have been wrong.
This past week, Goldman Sachs lowered the likelihood of a recession over the next 12 months from 35% to 25%. Since America averted (barely) a banking crisis and the potential debt ceiling fiasco is past us, the economic landscape has become much more tolerable.
During my speaking engagements, I like to characterize the U.S. economy as productive, diverse and resilient. I think our ability to bounce back from almost any adversity is what I admire most about Americans and how we go about our daily lives, keeping this entire economic structure going. Yes, the word is resilient; it is who we are as a nation.
The Federal Reserve has spent the past 14 months raising interest rates 10 times, by a total 500 basis points or, if you prefer, 5% from near zero. The Fed’s actions are meant to slow consumer spending, reduce borrowing due to high-interest rates and raise unemployment by eliminating jobs in the private sector. Chairman Jerome Powell calls this a “soft landing,” i.e., slowing the economy to near-recession levels and then cutting interest rates to bring it back up without causing a recession.
Here is the problem: The job market’s resilience has made this scenario extremely difficult. For the past six out of 12 months, the unemployment rate hovered between 3.4% and 3.5%, the lowest rate in 50 years. The Consumer Price Index has fallen from 9.1% last summer to 4.0% in June. None of these numbers resemble a recession.
Over the past 70 years, since the end of World War II, every single recession has started with a rapid rise in unemployment. Every single one! As of this writing, we are creating more jobs than ever. The U.S. cannot have a recession without a considerable loss of jobs to start the downturn.
Think back 15 years to 2008. That year alone we lost Lehman Brothers, Merrill Lynch and Bears Stearns, all icons of the equities industry. Over 3 million Americans lost jobs at the beginning of the Great Recession. Thousands of businesses closed, trillions in wealth disappeared and the economic misery was palpable. Consumer confidence dropped to 34.6, its lowest rate in U.S. history.
In contrast, throughout our present journey — through the pandemic, past “the great reopening” and despite inflation, the war in Ukraine and the banking crisis — our economy has averted disaster. It almost reinforces the Fed’s predictions of a soft landing, for with each interest rate hike the economy has produced record job growth. America’s resilience is unquestionable.
Here’s something else to consider: gross domestic product grew 1.3% in Q1 and the Atlanta Fed’s GDP Now forecast for Q2 is 2%. That does not look like a recession either. Nor did last month’s job creation numbers of 339,000 new positions against a forecast of 195,000, an increase in new homes sales, a rise in building permits and the upbeat outlook of major homebuilders like D.R. Horton.
The Bottom Line
Here is my best estimate of where we are headed in the second half and into 2024.
The trend for some key economic indicators is negative and some predict a slowdown; you can see it in the numbers. But honestly, the so-called experts have been crying recession since 2021, when the reopening of the economy set off a race for things like used cars, gasoline, appliances and lumber that helped drive the inflation rate to 9.1%, the highest we’ve seen in 40 years.
Rising inflation always leads to recession; our history is clear on this fact. The Fed’s cumulative 5% rate increase is meant to get the U.S. near recession, and historically, once it gets to that point, it is almost impossible to prevent it from falling to the next level.
So, will there be a recession? I am in the same camp as Goldman Sachs. There is a 25% chance of a recession in 2023 and a 75% chance of a soft landing.
I will continue watching the trends and keeping you informed.
Joe Higgins is a 44-year veteran of GE and Whirlpool Corp. who brings his executive experience to bear as a business consultant, AVB keynoter and YSN contributor. Visit his website, Quest 4 Quality with Joe, at Q4QwithJoe.com.