Recession predictions have had constant coverage in recent financial news.
For 16 months straight, the Federal Reserve Bank of New York’s model has signaled a 50% chance of recession – a model that’s successfully anticipated every recession since 1960.
This consistent warning deserves attention, given its historical accuracy.
Wall Street’s most prominent voices, including Mike Wilson and Marko Kolanovic, have consistently predicted an imminent downturn in the past 2 years.
One reason for this is the underestimation of the US government’s influence.
Despite our own expectation of a 2024 recession, price signals suggest continued market strength in the months ahead
This disconnect between predictions and reality raises a crucial question:
Has government spending pushed the next recession years into the future?
To understand this, we need to revisit why so many were predicting a recession in the first place.
Why Experts Predicted a Recession
The Federal Reserve’s aggressive rate hikes tell a compelling story.
They raised rates from 0% to 5% in record time – a move that historically precedes recessions.
Throughout history, this pattern has been remarkably consistent.
Recessions are often marked by rising unemployment in the United States.
Every time a recession occurs, the unemployment rate increases.
Typically, unemployment rises about 18 months after rate hikes begin.
The relationship between interest rates and unemployment has been nearly perfect, with just 2 notable exceptions – 1984 and 1995.
In these 2 cases, unemployment continued declining despite rate increases.
But given the pace of hikes over the past 2 years, it’s easy to see why many expected economic weakness.
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Current Economic Reality
The National Bureau of Economic Research (NBER), which officially defines recessions, looks at 4 key metrics:
- Unemployment
- Personal income
- GDP
- Industrial production
Currently, none show typical recession characteristics.
Unemployment remains relatively low, while personal income and GDP have shown strong growth, even adjusted for inflation.
Lastly, industrial production has maintained steady levels as well.
So why isn’t the economy weakening?
The answer lies in government spending.
The Government’s Role
Government spending has reached remarkable levels, now representing 23% of GDP, while revenues sit at 17%.
This 6% deficit effectively means the government is injecting a significant portion of GDP into the economy annually, providing substantial economic support.
Deficit spending has also directly impacted the job market
The government is creating about 50,000 jobs monthly – among the highest levels in 30 years.
However, historical data shows similar government job creation hasn’t prevented past recessions.
In fact, increased government hiring often occurs before and during economic downturns.
Small Business Warning Signs
Despite government support, small businesses show increasing strain.
Small bussiness earnings growth has declined throughout 2023, with a sharp recent deterioration.
As the backbone of the American economy, small businesses represent 99% of U.S. enterprises and employ half the workforce, making their health crucial for economic stability.
Inventory trends among small businesses further adds concern.
When small businesses thrive, they typically increase inventories in anticipation of strong demand.
However, recent months have seen a precipitous decline in inventory building.
This pattern typically emerges heading into or during economic downturns, suggesting weakening confidence in future demand.
Despite these warning signs, our technical indicators remain positive.
The S&P 500 maintains a strong bullish structure, helping us time our entries and exits effectively.
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