Recession: Are We There Yet?

Anna Rathbun, Chief Investment Officer

Recession: Are We There Yet?

Many people are saying that there will not be a recession because:

The labor market is strong.

Americans have plenty of savings.

Equity markets are bullish.

Everyone I talk to is doing fine.
Others are saying that a recession is coming because:

Thousands of layoffs are in the headlines.

Americans are tired of inflation.

The bond market says so.

Everyone I talk to is worried.
All of these observations are true. However, people tend to focus on data that support what they already believe and ignore information that does not support those beliefs. This phenomenon, known as confirmation bias, explains why we hear so many diverging opinions which all seem to be factually accurate.
Despite these conflicting data points, I tend to believe that a recession is coming down the road. The yield curve has been inverted for over a year now, and the Fed has been hiking into it for just as long. Historically, recessions following a period of contractionary monetary policy have been a reliable sequence of events, and the underlying explanation is that we are a credit-driven society. When the cost of money increases rapidly, liquidity also dries up rapidly. We are already seeing the contraction of liquidity in the economic system through surveys, data, and consumer behavior.
The talk of a recession has been around since the Fed started to raise rates, but it seems not to have materialized yet. At this point, many people have found themselves wondering, “why is it taking so long?” or even “will it take place at all?”

Source: Bureau of Economic Analysis, Bloomberg. All data available as of 6/7/2023.
First of all, both households and corporations in the U.S. are flush with cash because of the accommodative monetary policy and fiscal policy during the pandemic. The chart above on the left shows the spike in personal savings every time there was a CARES Act and ARPA distribution from the federal government in 2020 and 2021.
The chart on the right shows that after 2020, cash flow jumped for companies in the S&P 500. When you have that much cash, it can hold you over for a while during hard times, or inflationary times, like now. Hence the delayed recession.
Another reason why the potential recession is taking so long to reveal itself is because it always takes time for monetary policy to make its way through Main Street. We still haven’t seen the full effects of the Fed’s rate hikes, and I think those who believe that we can avoid a recession are thinking that by the time the bulk of companies need to roll over debt with low rates and face higher interest rates, the Fed may cut rates anyway. Therefore, the rate hikes would have only affected those who needed liquidity while the rates are high, and that’s so far not a huge percentage. However, the Fed has been preaching “higher for longer” in order to get a handle on inflation, and there is no guarantee that the Fed will lower rates just in time for the bulk of the borrowers to refinance their loans.
The obvious question remains: if the Fed’s interest rate policy doesn’t affect Main Street in an impactful way, then exactly how did it tame inflation? Could it be that inflation would have come down by itself and that the cure for high prices is simply high prices?
On the other hand, maybe the Fed will keep rates high because it needs to see the rate hikes make their way through the economy, and we will end up going into a recession. After all, even if the Fed cuts rates as the dot plot from June 2023 suggests, it sees rates at around 4.65% by the end of 2024, just 100 bps below the projected rates for 2023. That’s still 465 basis points higher than when a lot of companies locked in their rates for loans before the rate hikes began.
The end of 2024 is also a long ways away from the current environment in which we are already seeing liquidity drying up and credit crunching like Rice Krispies. According to the latest Survey ofConsumer Expectations from the Federal Reserve Bank of New York, 12.4% of respondents stated that credit is “much harder” to get, and 37.6% said it is “somewhat harder” to get. That’s a total of 50% saying that their facility in borrowing has changed for the worse. The net percentage of senior loan officers tightening their standards has also increased.
Another factor as we head into the fall months is the stress on the wallets of American consumers. Student loan payments will resume in October, and this is expected to have a significant impact on consumer spending habits because, according to the FederalReserve , the average student loan payment is between $200 and $299 per month.
In another study by the San Franscisco Fed, the pandemic stimulus savings are about to run out by the end of September. As student loan payments resume, many Americans are also running out of “excess savings” and will have to cut back on other expenses in order to make these monthly payments. Frugal Americans could lead to a downturn in the economy.
Finally, it is important to note that we are still in an earnings recession, meaning profits have contracted for at least two consecutive quarters. We are expecting Q2 earnings decline to be -4.1%, which would be another quarter of negative year-over-year earnings growth.
While there’s ample noise in the public discourse regarding the economic trajectory for 2023, the post-pandemic world is full of conflicting information about the health of the economy. However, amid the confusion of data points, the markets are pointing to some version of economic weakness ahead.
Perhaps by a huge stroke of luck, we will not end up in arecession. Perhaps we will still go into a recession because the Fed may have alreadyhiked rates too much and too fast. However, if we do go into a recession,barring any exogenous shocks like geopolitical events, it may be a shallow,rolling recession where different sectors and industries take turns confrontingeconomic challenges. The downside is that such recessions tend to be prolonged,which means we may be in a weak growth environment for a while. However, all ofthis is speculation, and I promise I do not have a crystal ball.
Investment advisory services provided through CBIZ Investment Advisory Services, LLC, a registered investment adviser and a wholly owned subsidiary of CBIZ, Inc.

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Anna Rathbun, Chief Investment Officer

Recession: Are We There Yet?

Many people are saying that there will not be a recession because:

The labor market is strong.

Americans have plenty of savings.

Equity markets are bullish.

Everyone I talk to is doing fine.
Others are saying that a recession is coming because:

Thousands of layoffs are in the headlines.

Americans are tired of inflation.

The bond market says so.

Everyone I talk to is worried.
All of these observations are true. However, people tend to focus on data that support what they already believe and ignore information that does not support those beliefs. This phenomenon, known as confirmation bias, explains why we hear so many diverging opinions which all seem to be factually accurate.
Despite these conflicting data points, I tend to believe that a recession is coming down the road. The yield curve has been inverted for over a year now, and the Fed has been hiking into it for just as long. Historically, recessions following a period of contractionary monetary policy have been a reliable sequence of events, and the underlying explanation is that we are a credit-driven society. When the cost of money increases rapidly, liquidity also dries up rapidly. We are already seeing the contraction of liquidity in the economic system through surveys, data, and consumer behavior.
The talk of a recession has been around since the Fed started to raise rates, but it seems not to have materialized yet. At this point, many people have found themselves wondering, “why is it taking so long?” or even “will it take place at all?”

Source: Bureau of Economic Analysis, Bloomberg. All data available as of 6/7/2023.
First of all, both households and corporations in the U.S. are flush with cash because of the accommodative monetary policy and fiscal policy during the pandemic. The chart above on the left shows the spike in personal savings every time there was a CARES Act and ARPA distribution from the federal government in 2020 and 2021.
The chart on the right shows that after 2020, cash flow jumped for companies in the S&P 500. When you have that much cash, it can hold you over for a while during hard times, or inflationary times, like now. Hence the delayed recession.
Another reason why the potential recession is taking so long to reveal itself is because it always takes time for monetary policy to make its way through Main Street. We still haven’t seen the full effects of the Fed’s rate hikes, and I think those who believe that we can avoid a recession are thinking that by the time the bulk of companies need to roll over debt with low rates and face higher interest rates, the Fed may cut rates anyway. Therefore, the rate hikes would have only affected those who needed liquidity while the rates are high, and that’s so far not a huge percentage. However, the Fed has been preaching “higher for longer” in order to get a handle on inflation, and there is no guarantee that the Fed will lower rates just in time for the bulk of the borrowers to refinance their loans.
The obvious question remains: if the Fed’s interest rate policy doesn’t affect Main Street in an impactful way, then exactly how did it tame inflation? Could it be that inflation would have come down by itself and that the cure for high prices is simply high prices?
On the other hand, maybe the Fed will keep rates high because it needs to see the rate hikes make their way through the economy, and we will end up going into a recession. After all, even if the Fed cuts rates as the dot plot from June 2023 suggests, it sees rates at around 4.65% by the end of 2024, just 100 bps below the projected rates for 2023. That’s still 465 basis points higher than when a lot of companies locked in their rates for loans before the rate hikes began.
The end of 2024 is also a long ways away from the current environment in which we are already seeing liquidity drying up and credit crunching like Rice Krispies. According to the latest Survey ofConsumer Expectations from the Federal Reserve Bank of New York, 12.4% of respondents stated that credit is “much harder” to get, and 37.6% said it is “somewhat harder” to get. That’s a total of 50% saying that their facility in borrowing has changed for the worse. The net percentage of senior loan officers tightening their standards has also increased.
Another factor as we head into the fall months is the stress on the wallets of American consumers. Student loan payments will resume in October, and this is expected to have a significant impact on consumer spending habits because, according to the FederalReserve , the average student loan payment is between $200 and $299 per month.
In another study by the San Franscisco Fed, the pandemic stimulus savings are about to run out by the end of September. As student loan payments resume, many Americans are also running out of “excess savings” and will have to cut back on other expenses in order to make these monthly payments. Frugal Americans could lead to a downturn in the economy.
Finally, it is important to note that we are still in an earnings recession, meaning profits have contracted for at least two consecutive quarters. We are expecting Q2 earnings decline to be -4.1%, which would be another quarter of negative year-over-year earnings growth.
While there’s ample noise in the public discourse regarding the economic trajectory for 2023, the post-pandemic world is full of conflicting information about the health of the economy. However, amid the confusion of data points, the markets are pointing to some version of economic weakness ahead.
Perhaps by a huge stroke of luck, we will not end up in arecession. Perhaps we will still go into a recession because the Fed may have alreadyhiked rates too much and too fast. However, if we do go into a recession,barring any exogenous shocks like geopolitical events, it may be a shallow,rolling recession where different sectors and industries take turns confrontingeconomic challenges. The downside is that such recessions tend to be prolonged,which means we may be in a weak growth environment for a while. However, all ofthis is speculation, and I promise I do not have a crystal ball.
Investment advisory services provided through CBIZ Investment Advisory Services, LLC, a registered investment adviser and a wholly owned subsidiary of CBIZ, Inc.