Is Next Recession Overdue?

Recession Uncertainty: No Consensus on the Likelihood of a Downturn

Bullion.Directory precious metals analysis 13 October, 2023
By Isaac Nuriani
CEO at Augusta Precious Metals

Heading into this year, that wasn’t the case.

March 2022 was the first time in this current cycle of tightening that the Federal Reserve raised interest rates. A month after that initial increase, economists polled by Reuters pegged the chances of recession at 25% in the subsequent 12 months and at 40% within two years.[1]

By October 2022, those economists said chances of recession one year out were up to 65%.[2] According to another Reuters poll conducted in March of this year, economists said there was a 65% chance of recession hitting within two years.[3]

But a few months ago, something funny happened on the way to the recession. A lot of smart people – people who previously had said that a recession was coming – decided that, no, recession probably isn’t coming after all.

Michael Gapen, chief U.S. economist at Bank of America, is one of those smart people who modified a previous recession call. In July 2022, he was forecasting recession. By August of this year, he no longer was.

“Incoming data has made us reassess our prior view,” Gapen wrote. “We revise our outlook in favor of a ‘soft landing’ where growth falls below trend in 2024, but remains positive throughout.”[4]

Not all economists have changed their outlooks accordingly, however. There still are plenty of analysts who think that recession very much remains in our near-term future.

This lack of consensus leaves consumers and retirement savers in a tough spot. It’s difficult enough to navigate the economic landscape effectively when there seems to be broad agreement as to where things are headed. But when there is no such agreement? In that case, the challenges can be especially daunting.

This week, we’re going to see if we can gain an updated understanding of what’s on the minds of those who say a recession is bearing down on the economy as well as those who say a recession will pass us by. Additionally, we’re going to spend some time addressing the issue of how consumers and savers might at least think about what to do when it appears that even the experts on the economy cannot seem to agree about where it’s headed.

First, though…what are economists thinking these days?

Bloomberg Economics: Soft Landing Still Possible…but Not the Most Likely Outcome

Bloomberg Economics says recession remains its base case. One of the principal reasons they cite: The full impact of the Federal Reserve’s stringent rate-hike regime has yet to be felt.

Saying that it takes 18 to 24 months for rate increases to materially impact such factors as the unemployment rate, Bloomberg believes that means the effects of the total 525-basis-point rate boost (thus far) could not be felt until the end of this year, at the earliest.[5]

And, as Bloomberg Economics notes, the Fed very well may not be done hiking at this point. The most recent Fed projections say central bankers are planning to hit the economy with one more rate increase this year before they stop hiking.[6]

But the folks at Bloomberg Economics see a good deal more justification for thinking inflation remains in the cards than the fact rate-hike impacts may still be crawling their way to their intended targets.

One of those reasons is something I discussed last week: The new wave of threats washing over the economy. Among them: the possibility of a protracted autoworkers strike, the restart of student-loan payments, the surge in oil prices and the very-real possibility we will, in fact, have to suffer through a contentious government shutdown.[7]

Bloomberg Economics also sees the slowdowns now in motion in key locations around the world as another reason that recession likely is unavoidable here.

Bloomberg economists say the real-estate crisis with which China is dealing, presently, may complicate life for the U.S. economy. They also point to the drop in lending within the Eurozone as another global influence expected to be felt here in America. In fact, says Bloomberg, that decline in lending is unfolding at a faster pace than the one that occurred at the depths of the sovereign debt crisis from 2009 until the late 2010s.[8]

Another reason Bloomberg is expecting a recession is one you don’t hear mentioned all that often: the results of the Federal Reserve’s Senior Loan Officer Opinion Survey, or SLOOS.

According to the latest edition of the survey, it appears that roughly half of the nation’s large and mid-sized banks are making access to commercial and industrial loans more difficult. Bloomberg Economics says that’s the most since the financial crisis (outside of the pandemic), and the economy will feel the impact at some during the fourth quarter.[9]

The upshot of all of this, as far as Bloomberg Economics is concerned?

A soft landing remains possible. Is it the most likely outcome, though? With the US confronting the combined impact of Fed hikes, auto strikes, student loan repayments, higher oil prices, and global slowdown we think not.[10]

Others that still see recession on the way include The Conference Board. The board’s principal economist Erik Lundh says we should look for the economy to fall into recession early in 2024.

“This outlook is associated with numerous factors,” Lundh explains, “including, elevated inflation, high interest rates, dissipating pandemic savings, mounting consumer debt, lower government spending, and the resumption of mandatory student loan repayments.”[11]

As for the consumer spending to which so many have pointed as “proof” the economy remains in good shape, Lundh says, “This trend cannot hold,” adding that “compensation growth is decelerating, pandemic savings are dwindling, and household debt is rising rapidly. Additionally, new student loan repayment requirements will begin to impact many consumers starting in October.”[12]

The Conference Board projects real GDP growth for 2024 will land at 0.8%.[13]

So what about those who say recession is going to pass us by? What is it that they’re thinking?

Federal Reserve President Bostic: I See No Recession on the Horizon, and Rates Are “Sufficiently Restrictive” Now

Among the most prominent members of the “no-recession” camp are the analysts at Goldman Sachs.

In a research report published last month, Goldman analysts said the chances of the U.S. seeing a recession within the next year now are just 15%.[14] Notably, that’s in line with the long-term historical average chances that a recession will form in any given year.[15]

In the report, analysts objected to the idea that an ugly outcome is in store for the economy from eventual impacts from higher rates, saying:

We strongly disagree with the notion that a growing drag from the ‘long and variable lags’ of monetary policy will push the economy toward recession. In fact, we think the drag from monetary policy tightening will continue to diminish before vanishing entirely by early 2024.[]

Notably, Goldman’s chief U.S. economist, Jan Hatzius, also thinks the Fed is finished raising interest rates.[17]

Even the recent surge in Treasury yields isn’t likely to trigger recession, according to Goldman analysts.

In a note published last Sunday, Goldman economists said, “The main implication of the further tightening in financial conditions led by rising rates is that the drag on GDP growth will last longer.” They suggested U.S. GDP growth could drop by half a percentage point over the next year as a result. Calling that potential decline “meaningful,” Goldman economists nevertheless maintain it’s “too small to threaten recession.”[]

For his part, Atlanta Federal Reserve Bank President Raphael Bostic told the American Bankers Association earlier this week that he sees neither any additional rate hikes nor recession in the economy’s future.

Bostic told the gathering, “I actually don’t think we need to increase rates anymore” in order for the central bank to reach its 2% inflation target.[19] Bostic said he thinks rates are at a “sufficiently restrictive level” now.[20] He actually agrees with Bloomberg Economics that the full impact of rate hikes is still on the way, but says the economy is strong enough to “sop up” that impact without falling into recession.[21]

And in its latest quarterly economic forecast released last week, the esteemed UCLA Anderson Forecast said it sees weakness in the 2024 economy – but no recession.

UCLA Anderson Forecast: Concerns About Recent Risk Events Could be Exaggerated

For starters, UCLA Anderson sees the potential impacts of recently evident risks such as the autoworkers strike and a possible government shutdown as more diminished.

Unlike those who see a potentially synergistic impact arising from these events, UCLA Anderson economists view them as discrete events, and measure their potential impacts accordingly:[22]

Based on historical impacts of these types of events, they shaved only a few tenths of one percent off of the GDP growth forecast.[23]

Also, as with Goldman Sachs and Raphael Bostic, UCLA Anderson thinks just the right mix of economic output, inflation decline and monetary policy is in place, presently, to help ensure a scenario that doesn’t include recession. Anderson does expect the Fed to follow through with the widely anticipated 25-basis-point rate hike later this year, but to refrain from tightening any further.[24]

Although Anderson admits “the impact of higher interest rates will be felt in restraining growth in 2024,” they add that “as the Fed turns its attention away from aggressive interest rate increases and inflation slowly works its way back to under 3% annually, the forecast calls for Fed policy to take a neutral stance and economic growth to rebound to trend rates.”[25]

There it is. Both sides of the recession “argument.” And each highly credible.

I’m not sure that I can recall another time when so many highly qualified economists and analysts were so divided on the near-term outlook for the economy. Augusta Precious Metals’ director of education suggested at the beginning of the year that the overriding theme of 2023 likely would be “uncertainty.” And as things have turned out over the last 9½ months, it’s difficult to imagine another year for which that word would be a better match than this one.

As for how retirement savers might engage this uncertainty, let’s briefly chat about that as we close out.

Acute Uncertainty May Require Additional Investment Consideration

For consumers and retirement savers, the matter of this uncertainty is much more than a mere talking point. It is a potentially significant impediment to the order of their personal financial circumstances – and therefore something that many might want to find a way to address.

Uncertainty, by definition, means that we are much less certain than usual about what might come. In such a case, the options available to help lessen the potential impact of that uncertainty on financial resources may be more limited. After all, if you’re largely unsure about what’s ahead…how do you reasonably proceed?

That challenge doesn’t mean there is literally no way one can try to effectively help themselves. One choice that some make in the interest of mitigating the potential impact of uncertainty – and the economic volatility it can trigger – is to in include among their holdings those assets that historically have demonstrated some potential to strengthen during economic climates that lack clarity.

One of those asset classes is precious metals. Over the last 15 years – a period of time when global economic uncertainty has been increasing steadily – gold has shown itself to be a fundamentally uncorrelated asset.[26] And since the beginning of the millennium, the price of gold has appreciated nearly 600%.[27]

To be clear, neither gold nor silver may be appropriate asset choices for some. But it’s important to recognize that uncertainty is real and characteristic of the current economic environment.

It might be a good time for some people to find a way to mitigate the potential fallout…rather than allowing its effects to prevail entirely uncontested.

[1] Hari Kishan and Jonathan Cable, Reuters.com, “Global growth to slow as inflation bites: Reuters poll” (April 27, 2022, accessed 10/12/23).

This article was originally published here

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