There’s just one problem with the fact that the widely predicted 2023 recession didn’t actually happen: It could still happen.
Extremely strong labor market data and surging inflation over the past year have convinced most previously bearish economists and investors that the U.S. economy can avoid a downturn, and stocks have rallied impressively: The S&P 500 has risen 25% over the past 12 months and is currently at an all-time high.
But now, with some economic indicators starting to worsen, investors fear a recession may be on the way, said Albert Edwards, a strategist at Societe Generale who predicted the dot-com bubble.
“Because ‘true’ stock market bear markets (drops of 30% or more) really only occur during economic downturns, this is what stock investors fear most, especially against the expectation that the economic recovery will continue,” Edwards wrote in a June 5 client note.
Edwards said there are several warning signs that a recession is on the horizon. First, there’s the recent sharp drop in GDP forecasts. The Atlanta Fed’s GDPNow model lowered its second-quarter GDP forecast to 1.8% on June 3, down from 3.4% a week earlier, due to weak manufacturing data. But the model’s forecast has since risen to 3.1%, thanks in part to Friday’s jobs data.
Atlanta Fed
Though expectations have rebounded over the past few days, Edwards noted that GDP is roughly in line with recent declines in new orders data from the Institute for Supply Management, which suggests that GDP growth could slow to below 1% in the coming months.
Societe Generale
“As GDP growth collapses, stock investors should be worried,” Edwards said. “A recession may be coming after all.”
Edwards also pushed back against the idea that the Fed could stop a stock market crash by cutting interest rates if a recession did occur.
“Even if Armageddon looms, I guarantee the investment environment will be filled with bulls singing the praises of a soft landing,” he said. “I also guarantee that any downturn will be shallow because the Fed has ample power to cut interest rates. It has always done so in past downturns, but that has never prevented a stock market collapse.”
Macro Images
A recession in the coming months would certainly surprise investors: A Wall Street Journal survey of economists in April gave the U.S. a 29% chance of a recession in the next 12 months. Compare that to the 61% probability economists predicted in January 2023.
But has a recession really begun? Several traditional indicators with a perfect track record of predicting recessions over the past few decades, such as the Conference Board’s Leading Economic Index and the Treasury yield curve, suggest the answer.
But economic data is mixed right now: On the one hand, the US economy added 275,000 jobs in May, well above expectations for the 182,000 it had, and inflation is also above 3%, suggesting consumer demand is holding up.
Meanwhile, the unemployment rate rose to 4.1% in May, up from last year’s low of 3.4%. The year-on-year change in the number of unemployed people, excluding the labor force participation rate, is also at a level consistent with an economic recession.
Piper Sandler
Jobs data earlier this month also disappointing, reaching the lowest level since the beginning of 2021.
In short, there are plenty of signs that the economy is slowing, but it remains to be seen whether and to what extent the economy will continue to slow, and how the Federal Reserve will adjust policy in response.
But as Edwards says, what really matters to investors is how things are stacking up against expectations, and right now the latter are sky-high.
