Following a span of historically low borrowing costs in recent years, the world was thrust into a period of global inflation by the pandemic. This inflation surge was driven in part by rising energy prices, a slew of supply chain complications and a backlog of orders for goods and services. Economists and market experts widely anticipated a recession in early 2022, a response to central banks, including the Fed, tightening monetary policy by raising interest rates to combat inflation.
A notable October 2022 Wall Street Journal survey, which gathered input from more than 60 economists, painted a grim picture. Respondents forecast that the U.S. would experience a recession within the next year, with early 2023 witnessing a contraction in gross domestic product. Such predictions were unusual as recessions typically materialize without warning, often taking economists and market forecasters by surprise. In reality, GDP increased by 2% in Q1, followed by a 2.4% increase in Q2.
By examining three critical factors, we can gain a clearer perspective on why the U.S. economy has managed to evade a recession in the past year or so, underscoring the importance of disregarding headline noise when making investment decisions on behalf of clients.
October's job data revealed an increase of 150,000 jobs, below the projected estimate of 180,000, but on par with what the economy was adding monthly pre-pandemic. This underscores the surprising expansion of employment, even in the face of a challenging interest-rate environment. Job growth has remained impressively consistent, fueled by improved consumer confidence and an economy that, so far, has proven resistant to inflationary pressures.
The higher consumer costs borne out of inflation have compelled more individuals to actively seek employment. Despite concerns in the banking sector from earlier in the year, recent layoffs in the technology industry and the increased cost of borrowing capital, sectors such as private education and services have led the way – exhibiting wage growth and steady productivity levels, contributing to a buoyant job market.
As the U.S. economy maintains its pattern of moderate GDP growth, corporate earnings have demonstrated a similar level of resilience to job creation. Pessimism about a recession and concerns surrounding earnings have gradually waned – supported by data from FactSet indicating that the number of companies reporting positive earnings surprises and the magnitude of these surprises exceed their 10-year averages through Q2.
Meanwhile, third-quarter per-share profit for companies in the S&P 500 Index is projected to dip by 0.3% collectively, marking the fourth consecutive quarter of declines. Nonetheless, despite a brief decline in August due to concerns about sustained higher borrowing costs, the index has recorded a 9.23% gain through the end of October. Resilient corporate earnings are an encouraging sign of economic vitality.
Despite dire predictions from industry figures like Jamie Dimon of JPMorgan Chase, the assessment of when the U.S. officially enters a recession falls upon the shoulders of eight economists affiliated with the National Bureau of Economic Research. These economists consider various factors, including employment, productivity, and spending, among others.
These same factors indicate that the U.S. economy plateaued from September 2022 through February 2023 but has been regaining momentum ever since. While the possibility of a recession lingers into the end of 2023 and beyond, the data are signaling a different trajectory, heralding optimism that the worst may be behind us.
Earlier predictions of an impending recession have stirred concerns and raised eyebrows among investors. However, it's vital to approach these forecasts with caution. As Warren Buffet has noted in his shareholder letters: “In the short run, the market is a voting machine, but in the long run it’s a weighing machine.” While an asset's true value might fluctuate due to short-term market conditions and sentiment, it almost always finds its way back in the long run.
The U.S. economy, as evidenced by these three key factors, has displayed remarkable resilience in the face of various challenges. Nonetheless, the markets remain volatile, and the unpredictability of global events can always throw a curve ball. It’s essential for advisors and investors to remain vigilant, diversified and informed. Amidst the cacophony of recession predictions, it serves to recall the importance of not succumbing to headline noise.
To that end, advisors would do well to stick to fact-based, data-driven investment strategies, particularly during periods of market volatility or uncertain economic conditions. This approach aims to equip client portfolios with the resilience to weather whatever the market throws at them.
Chris Shuba is CEO and founder of Helios Quantitative Research, pioneer of the Insourced Chief Investment Officer model that provides financial advisors with tools and support.
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