Ecoinometrics - Don’t dismiss the risk of a recession

Some lagging indicators might look good right now, but things can change quickly.

One of the tag-lines of this newsletter is that without data you are just another investor with an opinion. This applies exceptionally well to what we are going to discuss today.

The latest data out of the US economy showed a GDP revised to the upside and a very resilient job market. Almost everywhere people look there are signs that the Federal Reserve is going to achieve a soft landing… based on that a lot of analysts are starting to dismiss the possibility of a recession.

The problem is that conclusion is based on a misconception: historically it is not true to say that strong economic data now can tell you there won’t be a recession within six to twelve months.

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Don’t dismiss the risk of a recession

The takeaway

The GDP of the US might have been revised to the upside. The initial jobless claims and the unemployment rate might be low. The wages of the US workers might continue to grow at a faster pace than core inflation. But historically speaking that means nothing if we are 6 to 12 months away from a recession.

The inversion of the yield curve is a signal that has always preceded US recessions. The beginning of the inversion would put the next recession:

• Anywhere from March 2023 to July 2024.

• The most likely range being Q4 2023, Q1 2024.

The lagging economic indicators everyone is talking about typically degrade only when you get to the start of the recession proper…