By Emily McCormick
Everybody’s talking about a recession that may not come — anytime soon.
Calls for a downturn have escalated in recent months amid soaring inflation, inverted Treasury yield curves, and the specter of tighter monetary policy from the Federal Reserve. Goldman Sachs economists said they place the odds of a recession in the next year at 15%, and in the next two years at a more worrying 35%. A recession is defined as two consecutive quarters of negative growth in a country’s gross domestic product (GDP).
And it’s not just the Wall Street banks. Google searches in the U.S. for “how to prepare for a recession” nearly tripled over the past week alone, said Neil Dutta, head of economics at Renaissance Macro Research, citing Google Trends data. However, this spike in interest may actually be a sign that concerns of a recession are reaching an apex.
“Indeed, when the sell-side consensus is competing to see who can pencil in rising recession probabilities fastest and ordinary people are searching about these topics on the internet, you can be sure the news is already reflected in market prices,” Dutta said in a note Monday. “The next move is lower recession risk and slower inflation rates.”
What’s particularly “unusual” about recession talk this time around, Dutta added, is how disconnected it is from the strength in economic data. Many of the most recent U.S. reports have painted a picture of an economy still firing on all cylinders, even as inflation runs at its fastest rate in 40 years. In the labor market, non-farm payrolls have increased by an average of over 550,000 per month in the first quarter this year, following average growth of more than 600,000 per month in the fourth quarter.
“That’s barely consistent with a slowdown, let alone a recession,” Dutta said.
And even consumer sentiment, which has been weighed down this year by rising prices, has shown signs of recovering from a nadir. The University of Michigan’s closely watched Surveys of Consumers index unexpectedly rose to 65.7 in early April, which while still depressed compared to pre-pandemic levels, was up nearly 11%, compared to the prior month’s more than 10-year low.
Some other strategists also suggested the lingering cushion of consumer savings and still-resilient spending would help prop up the U.S. economy.
“I would say it’s probably closer to a coin toss that the economy will be moving into recession by the end of the year,” Vincent Reinhart, Dreyfus and Mellon chief economist and macro strategist, told Yahoo Finance Live.
“By some measures, households have in the neighborhood of $2 trillion of excess savings. They can start working [those] savings down — and they are,” he added. “And that will be an important buffer.”
Still, those calling for a near-term recession have drawn on a host of historically reliable indicators that have been already flashing red. As Goldman Sachs’ economists pointed out, 11 out of the 14 Fed tightening cycles since World War II have been followed by a recession within two years. And the Fed this year has already begun raising interest rates and signaling its intent to soon begin quantitative tightening (QT), or rolling assets off its $9 trillion balance sheet.
Economists at Deutsche Bank, the first major Wall Street bank to call for a U.S. recession next year, said it is “The more aggressive tightening of monetary policy that we envision will end up pushing the economy into a recession,” according to a note from the firm’s economist Brett Ryan.
“While timing the exact quarters of negative growth is never easy, we see the Fed’s tightening beginning to materially slow growth in the second half of 2023,” Ryan said in a note last week. “Our baseline forecast has negative quarters for growth in Q4 2023 and Q1 2024, consistent with a recession during that time.”
Plus, a key part of the U.S. Treasury yield curve has already inverted, with the yield on the 2-year note rising above that on the 10-year note earlier this month. Such an inversion came before each of the last eight recessions since 1969. But as many pundits pointed out, that occurrence says little about exactly how soon to brace for the downturn to begin.
“I’m going to go in the ‘no recession’ camp for this year,” Michael Antonelli, managing director and market strategist at Baird, told Yahoo Finance Live on Monday.
“If you use the yield curve inversion as your signal, which we all know it’s a pretty good signal, the shortest a yield curve has led to a recession is 6 months, that was back in COVID, the longest was 33 months … the average is 17 months.”
“Unless you think the recession’s going to come faster than it did for COVID, it’s somewhere out in 2023, possibly in 2024,” he added. “Right now, companies are hiring, businesses are expanding, people are working and spending money … I don’t think it’s imminent right now.”
Emily McCormick is a reporter for Yahoo Finance. She previously wrote for Bloomberg News in New York and Washington, D.C.