by Gary Alexander

May 31, 2023

“Even as generals often prepare to fight the last war, our economists and others have given considerable attention today to preparing measures for combatting the last depression.” – Journal of Politics (1949)

The Conference Board – which has a 100% success rate in predicting recessions – is 99% certain that America will be mired in a recession this year. Their most recent recession probability (published May 10) says the chances “remain near 99% … that economic weakness will intensify and spread more widely throughout the US economy over the coming months, leading to a recession starting in mid-2023.”

They see real GDP declining this quarter (-0.6%) and growing worse (-1.6% in 3Q), and -1.2% in 4Q.

They admit that they were wrong about 2022: “GDP growth defied expectations in late 2022 and early 2023 data has shown unexpected strength,” but “we continue to forecast that GDP growth to contract for three consecutive quarters starting in Q2 2023. Despite better-than-expected consumer spending recently, the Federal Reserve’s interest rate hikes and tightening monetary policy will lead to a recession in 2023.”

But I like 99-1 longshots, like this week’s Game 7 NBA Finals. On Memorial Day, the #2-seed Boston Celtics met the #8-seed Miami Heat in Game 7 of the NBA Eastern finals. No team has ever fallen behind three games to none (like Boston and 150 other teams did) and come back to win it all– but Boston was on the verge of doing that. They failed, but now Miami can be the first #8-seed team to win the Finals!

In 2004, Boston overcame even longer odds. After 85 years of bad luck from trading Babe Ruth to the Yankees, the Red Sox were down 3-0 in games to the Yankees in the AL Championship series, and down 3-2 in the bottom of the 9th, facing future Hall of Fame reliever Mariano Rivera, but Rivera blew the save, and the Red Sox won in the 12th inning. The next night, the Red Sox won in 14 innings, then won two straight in Yankee Stadium, including Game 7 in a romp 10-3, winning 4 straight. Then they beat St. Louis 4 games straight in the World Series to win 8 in a row, breaking the Bambino’s curse with flair. So, Boston is the only city to overcome the 3-0 deficit in both baseball and basketball to win a 7-game series.

So, past tendencies are made to be broken. Yesterday’s rules don’t always apply to the new realities in the marketplace, any more than they apply to Boston sports teams or wars, so I’ll take that 99-to-1 bet that we won’t have a recession in the second half of 2023, despite the expert opinions, and evidence they present.

Past tendencies don’t guarantee the same outcome, and politicians have a way of putting off the day of reckoning. After all, China hasn’t had an official recession in over 45 years. It’s amazing what politicians can do when they keep pouring money into big problems. Kicking cans down the road can work wonders.

The Doomsday crowd never seems to be satisfied unless we’re headed into a recession. For the full 11 years after the Great Recession of 2008-09, pundits kept expecting “the second shoe to drop.” The Fed kept interest rates near zero for the entire eight years of the Obama Administration, with three rounds of Quantitative Easing (QE), since they thought the recovery was so fragile. It took a global pandemic – the worst since 1918 – to finally cause a recession, and that was a man-made business reversal (a forced lockdown) and lasted only one quarter. Ever since then, the negative press has expected a deeper drop.

This time, they say, is different: All the recession ducks are lined up in a row. There can be no question. A recession is 99% certain. Below, I’ll list three of their most convincing reasons – and my rebuttals:

Proof of a Coming Recession – From “Yesterday’s Playbook”

#1: The Conference Board’s Leading Economic Index (LEI) was specifically designed to predict coming recessions. It fell for the 13th consecutive month in April. As you can see, when it dips deeply below zero, a recession is certain to follow. It is well below zero now – and for the last year – without a recession yet.

Graphs are for illustrative and discussion purposes only. Please read important disclosures at the end of this commentary.

However, as economist Ed Yardeni reminds us, the 10 LEI components focus on the old manufacturing economy (30% of GDP), not services (70%), but Yardeni says, “The goods side of the economy has been depressed since mid-2022 because consumers have pivoted from buying goods to purchasing services. So, the economy has continued to grow, supported by services and defying the recession heralders.”

True, the manufacturing sector has been in recession, but the services PMI dipped below 50 only once.

Graphs are for illustrative and discussion purposes only. Please read important disclosures at the end of this commentary.

#2: The inverted yield curve. The yield curve inverted before the last four real recessions, in 1981-82, 1990, 2000, and 2008. Even with the artificial 2020 recession, caused by a forced COVID-19 lockdown, the yield curve was neutral before that recession. Today, we have the most inverted yield curve since the double-dip recessions of 1979-82, yet we still stubbornly grow our GDP each quarter since mid-2022.

Graphs are for illustrative and discussion purposes only. Please read important disclosures at the end of this commentary.

The inverted yield curve seems to predict every past recession, but it hasn’t been perfect prior to 1980 and in this case, long-term rates have come down because investors believe the Fed has successfully put a cap on future inflation, which is good news. Declining long-term rates are a bullish sign, not a recession flag.

#3: M2 Money Supply has collapsed at the fastest rate in history – down $1 trillion in the last year – from April 2022 to April 2023, as the Fed has raised interest rates at the fastest rate in history: 500 basis points in just over one year. However, in context, before reducing M2 by $1 trillion, the Fed added $6 trillion in two years, so the net increase in money supply is still $5 trillion, which is a boat load of cash.

Graphs are for illustrative and discussion purposes only. Please read important disclosures at the end of this commentary.

The perma-bears will also cite the decline in trucking traffic, the drop in commodity prices (with a focus on energy), the rise in debt, the rise in jobless claims, and other arcane indicators, but they are all based on historical trends, ignoring the brave new post-pandemic world of (1) slack labor and (2) shock absorbers.

Chicken Little Usually Ignores Our New Response Mechanisms

Predictions of recession usually grab the headlines because bad news sells, but eventually we get tired of all these false prophets. On March 6, Wall Street Journal columnist Nick Timiraos exposed this racket, writing, “Why the Recession Is Always Six Months Away,” observing, “The next economic downturn has become the most anticipated recession in recent U.S. history. It also keeps getting postponed. Recent strong hiring and consumer spending are the latest evidence that the pandemic and the unprecedented policy measures that followed are interfering with the Federal Reserve’s campaign to tame inflation.”

Another reason the recession may be delayed is that Joe Biden wants to get re-elected, and he controls the major money flows. As Timiraos noted, “The government’s stimulus measures left household and business finances in unusually strong shape. … And Americans are splurging on labor-intensive activities they avoided in recent years, including dining out, travel and live entertainment.” In history, those running for re-election, or those wanting their Party to continue in power, were able to postpone the pain.

The worst Depressions in early U.S. history (Panics in 1837, 1893, or 1929) came just after election years.

  • Andrew Jackson let his Vice President Martin van Buren inherit the pains in the Panic of 1837.
  • Republican Benjamin Harrison let the Democrat Grover Cleveland manage the Panic of 1893.
  • Same with Calvin Coolidge. He let Herbert Hoover pay the piper for the Roaring 20s.

On April 27, 2023, Agha Bhattarai wrote in The Washington Post¸ “The recession warnings began in early 2022, when inflation was surging, the economy was shrinking, and consumers were feeling glum. But more than a year in, the long-feared economic downturn still hasn’t materialized.” She listed four reasons: 1) the labor market has been remarkably robust, as “strong hiring has outpaced layoffs that have marred the tech, media and finance industries.” (2) Government stimulus spending boosted personal income and bolstered excess saving. (3) “Even as Americans have stopped buying things, they’ve been happy to splurge on experiences, like restaurants, flights, concerts and ballgames.” And (4) “China’s economy has rebounded remarkably quickly in the months since it relaxed its zero-covid policies.”

We also have what Ed Yardeni calls our economic “shock absorbers,” particularly slack in our labor force, especially our youth and seniors, and the government still throwing money at the citizenry. My own feeling is that with so many youths enjoying “funemployment,” and so many seniors taking early retirement, as soon as they need to earn money again (say, in a down stock market), they will work again.

Yardeni sees the 46.7 million seniors not in the labor force as a gigantic consumer force, with “plenty of savings as well as income from pensions and Social Security. They also have lots of time to eat out, to travel, and to use healthcare services. So, they are spending more on labor-intensive services.” And with the jobless rate still at a 55-year low of 3.4%, you can’t tell me that we’ll be in a recession this quarter!

We are still early in the second Roaring 20s which, like the 1920s, followed a pandemic and depression in 1920, but then proceeded until 1929 without a recession. We could imitate that decade again…if we dare.

All content above represents the opinion of Gary Alexander of Navellier & Associates, Inc.

Please see important disclosures below.

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About The Author

Gary Alexander

Gary Alexander has been Senior Writer at Navellier since 2009.  He edits Navellier’s weekly Marketmail and writes a weekly Growth Mail column, in which he uses market history to support the case for growth stocks.  For the previous 20 years before joining Navellier, he was Senior Executive Editor at InvestorPlace Media (formerly Phillips Publishing), where he worked with several leading investment analysts, including Louis Navellier (since 1997), helping launch Louis Navellier’s Blue Chip Growth and Global Growth newsletters.

Prior to that, Gary edited Wealth Magazine and Gold Newsletter and wrote various investment research reports for Jefferson Financial in New Orleans in the 1980s.  He began his financial newsletter career with KCI Communications in 1980, where he served as consulting editor for Personal Finance newsletter while serving as general manager of KCI’s Alexandria House book division.  Before that, he covered the economics beat for news magazines. All content of “Growth Mail” represents the opinion of Gary Alexander

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