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March 10, 2023

News in Charts: Where’s my recession?

by Fathom Consulting.

In early February, Fathom warned that the receding probability of a recession might be superseded by the risk of higher rates, and that moving to such a scenario would not improve the outlook for markets. The two outcomes were also not mutually exclusive — the chances of suffering both were always a matter of timing.

This is almost exactly what has happened over the past month. The chart below shows how investors have backtracked on expectations of rate cuts and priced in further rate hikes over the next twelve months. As in February, inflation expectations remain the key variable determining which scenario might prevail, and when. The received wisdom in economics says that stronger-than-expected demand should lift inflation and force a still more hawkish stance from monetary policymakers who are already grappling with the post-pandemic acceleration in prices.

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The Atlanta GDP tracker estimate for 2023 Q1 has risen significantly since its trough on 1 February and ended the month above the Blue Chip consensus. It is certainly not screaming recession right now. The good news is not limited to the US — the OECD’s weekly GDP trackers have picked up in recent months across other key developed markets, as have measures of consumer confidence.

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Want more charts and analysis? Access a pre-built library of charts built by Fathom Consulting via Datastream Chartbook in Refinitiv Eikon.

However, the US yield curve has inverted even more, over the past few weeks. Often an inverted yield curve is seen as a sign of an upcoming recession (it signals an expectation that the Fed will cuts rates to boost growth). That said, other indicators (such as FROG, Fathom’s proprietary risk-off gauge) suggest that investors were risk-on in February. Investors flipflopping between recession and higher rates are an important, if not the most important, source of market volatility.

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Fathom’s Global Outlook, Spring 2023, published on 8 March, explains why a recession is still likely to materialise even as economic data have held up better than expected. These two (apparently conflicting) statements can be reconciled with an understanding that different data points provide different signals about the timing of a recession. In particular, macroeconomic data are generally better at telling you if you are in a recession right now, while market data, such as the slope of the yield curve, are better at explaining whether a slowdown is coming in six to twelve months’ time.

Historical precedent still points overwhelmingly toward recession:

  • A recession has never been avoided when consumer confidence has fallen as far as it has in the US, euro area and the UK in recent months
  • A recession has been avoided only twice, both in 1952, when inflation has risen has high as it has in the US, euro area and the UK
  • A recession has never been avoided when the Fed has tightened as aggressively as it has over the past twelve months

For this time to be different, a number of positive developments are needed, not least of which is a willingness on the part of households to spend a portion of their pandemic savings; a recovery in consumer confidence; an end to the period of declining real wages; a reduction in inflation persistence; an increase in labour market participation; and ongoing access to credit. It is possible that a recession can be avoided, but it remains unlikely.

Charts from Fathom’s Global Outlook, Spring 2023, will be available to Refinitiv users soon in Chartbook. For more information, please contact enquiries@fathom-consulting.com

The views expressed in this article are the views of the author, not necessarily those of Refinitiv Lipper or LSEG.

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