Recession talk rages on despite robust jobs market
If it seems as though we’ve been talking about a recession for about three years now, it’s because we have.
“We’ve been talking about a recession since the pandemic hit,” said Mike ter Maat, a libertarian economist. “This is a conversation that just doesn’t want to go away.”
For instance, JPMorgan Chief Operating Officer Daniel Pinto said at a conference on Friday "there will be a recession at some point," while a new Morgan Stanley note on Monday forecasted a "meaningful" earnings recession by the end of the year.
Those came after the federal government reported that 339,000 jobs were created in May, topping Wall Street estimates for the 14th straight month.
What gives?
“There are two reasons for this,” said Mark Zandi, chief economist of Moody’s Analytics. “One is that we’re in a world of high inflation and high interest rates and that typically ends with a recession.”
“The other reason there’s been so much talk about recession is because a lot of leading economic indicators that economists rely on to predict recession are screaming ‘recession’ and that’s hard to deny.”
For instance, the spread between the 2-year Treasury and 10-year Treasury has been inverted — meaning the yield on the shorter-term note is higher than the longer-term one — since July of last year, an historical predictor for recessions.
There's also that an innate feeling that the economy seems unusually vulnerable, said ter Maat.
Like some economists, ter Maat believes that we have already been through two recessions. One in the first and second quarters of 2020 because of the Covid-related shutdown and another, more mild one in the first two quarters of 2022. He thinks a third one may be in the works.
“The Fed is fighting against a boatload of inflation, we have had announcements of layoffs, and the stock market, which is one of the strongest indicators of future economic performance, is basically flat for the year, even down slightly when corrected for inflation” said ter Maat.
“When a recession is coming, things usually build up, build up, build up, and then all of a sudden, we’re in one. Typically things tip us into one,” he added.
Think back to the Great Recession, which began in 2007.
Remember the early signs? All you had to do was look around - millions of Americans were buying homes they couldn’t afford.
After all, mortgages were just too easy to get (think: no down payment, low initial monthly payments) and with very few standards in place to ensure that borrowers could repay them, too many people - with shoddy credit, insufficient incomes and suboptimal credit scores - jumped in.
As could be expected, demand hit the roof, pushing home prices higher and higher until boom - the bubble burst as interest rates rose and subprime borrowers started defaulting.
There were foreclosure signs all over the place.
The housing bust caused the stock market to crash, and Americans suffered staggering losses.
Granted, this is a simplified explanation - in hindsight - as to how this all went down, but the point is that there appeared to be a clear beginning to the Great Recession.
And a definitive end, marked by a long recovery of slow growth.
Today things seem much more confusing and different, said ter Maat. “The Great Recession had a more pronounced launch, with institutional failures in the financial sector. Things are much murkier today.”
The only thing that’s clear is that people have jobs, a decidedly positive indicator reiterated by the latest jobs report.
“One of the key variables we look at is jobs and the market is not only non-recessionary, it’s boom-like,” said Zandi.
The strong labor market is keeping consumers upbeat, said Ted Rossman, senior industry analyst at Bankrate.com and CreditCards.com. “While there has been some pullback on the purchase of physical goods, people are traveling, dining out, and otherwise weathering the storm remarkably well. We’re not seeing signs that discretionary spending is slowing down.”
That’s what’s most important, said Zandi. “At the end of the day, it’s about the consumer, which is the firewall between recession and no recession.”
Now, “there are cracks in the firewall,” he added, citing things like higher delinquencies in the credit card market and on auto loans in the sub-prime credit space. “But psychologically, the consumer is still in the game.”
Personal finance journalist Vera Gibbons is a former staff writer for SmartMoney magazine and a former correspondent for Kiplinger's Personal Finance. Vera, who spent over a decade as an on-air financial analyst for MSNBC, currently serves as co-host of the weekly nonpolitical news podcast she founded, NoPo.
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