The U.S. economy has been on a rollercoaster ride in recent years, with the Great Recession of 2008 still fresh in the minds of many Americans. With talk of a possible recession on the horizon, it is natural for people to feel anxious about the future. However, a close look at the U.S. economic state reveals that a recession is unlikely, according to a Monday note from Data Trek Research.
Nicholas Colas, DataTrek Research co-founder, said the strong U.S. labor market reduces the likelihood of a recession. The May employment report showed that 339,000 jobs were added to the economy, well ahead of the estimated 195,000.
Historical Trends
The U.S. economy has experienced ups and downs throughout its history, with periods of growth and contraction. However, the country has a track record of returning from economic downturns. For example, after the Great Depression of the 1930s, the U.S. economy experienced sustained growth that lasted for decades. Similarly, after the Great Recession of 2008, the U.S. economy has been steadily recovering, with GDP growth averaging around 2% per year.
Americans have been told since mid-2022 that a recession is just around the corner. But no economic downturn was seen over the last nine months. Recession could be imminent because of the inverted yield curve, high inflation, rising interest rates, and unexpected banking crises.
The most recent GDP data shows the U.S. economy grew at an annualized rate of 2.6% in the fourth quarter of 2022. This data comes on the heels of 3.2% annualized growth in the third quarter of 2022.
The report sets overall 2022 U.S. economic growth at 2.6%, making it clear that the U.S. was not in a recession in 2022. However, chief economist for Comerica Bank, Bill Adams, believes GDP will likely slow sharply in early 2023.
Economic Indicators
Several key economic indicators suggest that the U.S. economy is in good shape. The 2% average GDP growth per year has been steady. Unemployment rates of just 3.5% are at historic lows. Consumer spending, which accounts for around two-thirds of economic activity in the U.S., has been strong, with retail sales increasing by 0.3% in December 2019.
The New York Fed recession likelihood indicator shows a 68.2% probability of a U.S. recession in one year. That is by far the highest reading in over four decades. Other trustworthy economic indicators are warning signs that the U.S. economy could roll over soon.
However, despite all these elements, the U.S. labor market stays strong, and in this unique economic environment, economists are divided on whether or not a recession is inevitable.
Just because some experts believe the risk of a recession is rising, there’s no reason to panic. Recessions are relatively common — and they’ve often generated attractive opportunities for long-term investors.
The U.S. is not in a recession, but that possibility — combined with inflation — have consumers bracing for the fallout.
“We pay easily between $100 and $120 a week,” one shopper said. “I can’t imagine what it’s like to feed a family of four.” https://t.co/iL3a2ngvXZ
— Los Angeles Times (@latimes) June 5, 2023
Expert Analysis
U.S. recessions have been relatively common since World War II. Every five years or so, there has been about one U.S. recession.
Economists and financial analysts also suggest that a recession is unlikely. According to a recent survey of economists by the National Association for Business Economics, only 2% of respondents predicted a recession in 2020. Many experts believe the U.S. economy is resilient enough to weather any potential storms, thanks to a strong labor market, low inflation, and a healthy housing market.
Inflation is chilling, but shoppers are still spending. And hiring is slow — but not crumbling. In a CNN Business phone interview earlier this week, Zandi said it would be a struggle and feel uncomfortable. But the last two months’ data have been better, showing no financial market indicators that the country will have a recession ahead. He is increasingly confident that the American economy will — slightly — evade a slump.
A Mild Recession Is Still a Risk
Some may argue that the U.S. economy is due for a recession, given that the country has experienced periods of economic growth for a decade. However,
economists point out that economic cycles don’t follow a set schedule and that there is no reason to believe that a recession is imminent. Others may point to the inverted yield curve, which historically has been a predictor of recessions. Then again, experts suggest that the yield curve is not a foolproof indicator and that other factors, such as the strong labor market, should be considered.
On Tuesday, Brian Moynihan, Bank of America’s CEO, told CNN that the U.S. economy will probably slip into a mild recession next year.
S&P Global Ratings expects the U.S. economy to fall into a mild recession next year in line with the 1969-1970 downturn. Zandi thinks working to the economy’s advantage could end these fear of recession. He pointed out averting risky behavior, pushing businesses to keep cash on hand, and convincing officials in Washington to make prudent judgments.
The U.S. Economy Is in Good Shape
While it’s natural to feel anxious about the possibility of a recession, the evidence suggests that the U.S. economy is in good shape and that a recession is unlikely. Historical trends, economic indicators, and expert analysis all point to a stable and resilient economy capable of weathering potential storms.
As the economy progress, it’s important to stay vigilant and closely monitor economic developments, but there is no reason to panic. The U.S. economy has been through tough times and has always come out on top.
However, if the U.S. does slip into a recession in the second half of 2023 or the first half of 2024, investors need not panic. Here’s why.
Historically speaking, U.S. recessions last only a short time. The average duration of a U.S. recession since World War II is just 11.1 months. The Covid-19 recession in early 2020 lasted just two months.
Recession? Everyone Is Now Very Cautious
Some business leaders are warning a downturn is still likely to happen. But being so nervous about a recession makes it less likely that something needs to be fixed.
While recessions can lead to financial difficulties and job losses for Americans, they have historically been outstanding buying possibilities for long-term investors. Investors may find it challenging to time a market bottom, but the S&P 500 has yielded a 40% average recovery within a year following its low threshold.
Some stocks have a record of performing well during the 2020 and 2008 recessions. Chief strategist for LPL Financial, Jeffrey Buchbinder, says recession risks are ahead. Still, investors should appreciate how much the U.S. economic outlook has improved recently.
Written by Janet Grace Ortigas
Sources:
Market Watch: The U.S. Economy: Why a Recession is Unlikely; by Jeffry Bartash
Forbes: Is The U.S. Economy Heading For A Recession?; by Wayne Duggan
Business Insider: Is the U.S. in a recession? Not yet, but experts think we could be in one soon; by Madison Hoff
Yahoo! Finance: A recession is unlikely to hit the U.S. economy in the next 12 months after Friday’s hot jobs report; by Matthew Fox
Featured and Top Image by Michel G. Courtesy of Flickr – Creative Commons License
First Inset Image by Michel G. Courtesy of Flickr – Creative Commons License
Inset Image by Daniel Foster Courtesy of Flickr – Creative Commons License
