Examining the Growing Recession Risks

Here’s what we are up against: leading economic indicators are signaling imminent danger, the housing market has drastically cooled off, and the Federal Reserve is committed to ensuring we don’t repeat the economic environment of the 1970s. “Besides that, Mrs. Lincoln, how was the play?” I recently saw data that said there is 100% certainty of a recession this year. In a world of probabilities, I like to avoid absolutes like that. What follows is not a prediction of what I think will happen but rather a look at the other side of the argument.

Inflation is cooling off.

Recent inflation reports have become a favorite tool of politicians pointing to improvements in the economic situation. The widely tracked Consumer Price Index actually fell from November to December, which was cause for celebration in some circles. However, the index was still 6.4% above where it was a year ago, which is roughly three times higher than the Federal Reserve would like to see. While elevated prices are likely here to stay, the pace at which they are increasing is showing a declining trend.

The Federal Reserve is slowing the pace at which it is increasing interest rates because of slowing inflation.

Last year, we saw four straight increases of 0.75% before its December increase of 0.50%. Expectations are for a 0.25% increase in February and a slight chance of that being the final hike of this cycle. Inflation is the linchpin to all of this, and a resumption of an upward trend in prices would undoubtedly force the Fed’s hand again.

China has apparently thrown in the towel in its fight against COVID.

With that, its economic reopening could be an interesting story to follow this year. As the world’s second-largest economy, China represents a vital cog in the global economic machine. Their manufacturing helps to control costs by bringing more supply to the market. Additionally, the demand for goods and services within their borders and abroad is about to shift into high gear. Their population of 1.4 billion people is about to start spending money after accumulating cash over the last three years while sitting at home. Economic data and messaging from the Chinese government should always be taken with a grain of salt, but it is something to keep an eye on as it develops.

Housing could see a boost with mortgage rates declining.

Over the last twelve months, we have watched the housing market go from red hot to ice cold – a jump in mortgage rates from 3% to 7% will do that. Since peaking at 7%, mortgage rates have fallen and currently sit at 6.15%. That is still much higher than we saw during 2020-2021, but the squeeze has been eased. It has been said that housing is the business cycle because the purchase of a house directly or indirectly impacts many different sectors of the economy, from banks to consumer goods, so an uptick in housing activity would provide a boost to the economy.

Conclusion

Harry Truman once famously requested a one-handed economist because he was frustrated with his advisors beginning their economic reports with, “on the one hand….” Economists have dropped their two-handed approach by predicting a 100% chance of recession this year. There is no denying that things look bad at the moment, especially if you watch the news. Hopefully, this article has helped you to see the other hand.

Author: David Rath, CMT, CFA

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