The Energy Crisis That Was Anticipated And Feared A Few Months Ago Hasn’t Happened So Far
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What flavor of recession?
It seems like the United States is headed toward the most-anticipated recession maybe ever, and that sort of crowd or herd mentality worries me a bit. Gene, what are your thoughts? Gene: The United States is not currently in a recession, so let’s start there. Recent indicators from the Federal Reserve (Fed) point to near-trend growth for the last quarter, with drivers including healthy consumer spending, inventory building and some investment. But—and it’s a big but— some sectors of the economy are looking like they are in recession. While there is still a possibility of a soft landing, our team believes the United States will enter a recession this year, likely in the second half, and put that probability at around 65%.
Our research shows that recessions typically last around 10 months on average, although no two recessions are exactly alike, so take that with a grain of salt. We forecast several distinct economic scenarios:
• A soft landing would avoid recession and be the best outcome–we think there is about a 35% chance of this occurring;
• We place a “normal” recession at 50% odds. This would feature sticky inflation in housing, wages and services; a broader cyclical downturn; and higher unemployment coupled with a Fed that is slow to ease rates given inflation volatility;
• We think a “deep” recession is less likely and see a 10% probability of this happening. Significant demand destruction, Fed overtightening, and a slow fiscal policy response would likely cause this scenario; and
• Finally, we see a stagflationary recession as the least likely outcome, with just 5% odds. Sticky inflation in housing, commodities and wages with slow (or zero) economic growth would characterize this type of recession.
Sonal, what recession odds do you see?
Sonal: My odds are lower—one in four. I’m not anticipating a US recession. I think we are going to get stagnant growth in the third quarter of this year, and in the fourth quarter, probably a negative number on an annualized basis, and maybe a small negative number in the first quarter of 2024. But I don’t see a recession in terms of a very broad-based decline in economic activity. The reason is the US consumer. US consumers are alive and doing very, very well. As inflation comes down, which I expect, those nominal wage gains workers have seen will translate into real wage gains. Despite being a fixed income person, I would note what major airlines have been reporting—strong corporate profits amid a rebound in travel over the past quarter.
“ I’m not anticipating a US recession. I think we are going to get stagnant growth in the third quarter of this year, and in the fourth quarter, probably a negative number on an annualized basis, and maybe a small negative number in the first quarter of 2024. But I don’t see a recession in terms of a very broadbased decline in economic activity.” Sonal Desai
US consumers are one of the strongest forces of growth across not only the United States, but across the world as well. China is also coming back online, which has positive implications for growth. I put these things together and I don’t find evidence to back up this assumption that globally we’re going into recession. Even Europe is unlikely to fall into recession because of a warmer-than-expected winter. The energy crisis that was anticipated and feared a few months ago hasn’t happened so far. So, my view on recession is perhaps a bit contrarian. There is a lot of negative sentiment out there, but it’s not translating into actual behavior. That’s my take, but I would probably wait until we see the February economic numbers to know whether the consumer is actually in any kind of pain. In terms of Fed policy, I do think we will likely see three 25 basis-point (bps)1 rate hikes ahead.
