By one measure, this is one of the most unloved U.S. economies on record, Oxford Economics’ economist Bob Schwartz writes.
At least when judged by those expecting that economic conditions are about to stumble into recession.
“Despite a robust job market and continued strength in consumer spending, the economy has never been so unloved as it is now,” he wrote in a research note published Dec. 2. “More economists expect a recession sometime over the next year than any time on record.”
Indeed, the probability of a recession is the highest it has been on record, dating back to 1969, based on survey data from mid-November that Oxford Economics, along with Haver Analytics, are using to gauge economists’ views about the probability of a recession occurring over the coming 12 months (see chart):
Oxford Economics/Haver Analytics
Schwartz said that the Federal Reserve is contributing to this downbeat sentiment because Chairman Jerome Powell has reiterated his commitment to quashing inflation by raising interest rates, even if it means sending the economy hurtling into recession.
The gloomy economic outlook also has investors particularly skittish, with the Wall Street Journal’s Gunjan Banerji, citing Deutsche Bank data, reporting that “net bearish positions tied to stock futures recently touched the highest level of the past decade this year.”
The Dow Jones Industrial Average
the S&P 500 index
and the Nasdaq Composite Index
all finished Monday’s session sharply lower, as investors fear that a too-strong employment report means that the U.S. central bank needs to lift interest rates even further to cool an overheated economy and suppress inflationary pressures before they become entrenched.
The closely watched November jobs report on Friday showed that the U.S. economy gained over 260,000 jobs last month, with the unemployment rate holding steady at 3.7%. Economists polled by the Wall Street Journal had expected an addition of 200,000 jobs.
Oxford Economics/Haver Analytics
Importantly, wages, a key way to gauge inflation, jumped 0.6% in November, double the expected pace and highlighting that wages are still rising much faster than they were before the pandemic, when they rose about 2% to 3% a year.
Labor demand is still strong and it is an important measure of the economy’s vitality.
And if you’re questioning how that translates to a recession, you’re not alone. It isn’t clear when (or even if) a recession (consecutive quarters of negative GDP growth) will be achieved.
That said, the belief is that the Fed needs to do more harm if it intends on dislodging inflation from its perch and bringing it closer to the 2% level that the Fed deems acceptable for a healthy economy. The inflation rate for October was 7.7%, far higher than what Powell other Fed officials are comfortable with, even if that data reflected signs of a slowing pace of inflation.
Schwartz told MarketWatch that Oxford sees a recession hitting in the U.S. in the second half of 2023, which is a downgrade (of sorts) from expectations for the first half.
Many pros are expecting that the recession, if it comes, will be shallow and short-lived, but recessions don’t exist in hypotheticals, so we’ll only be able to assess after we’ve come out the other side.