Since the Federal Reserve began its unprecedented interest rate hike cycle two years ago, the voices of an impending U.S. economic recession have come in like a tidal wave.
As early as 2022, the Conference Board's Leading Economic Index was the first to signal a recession; the closely watched U.S. yield curve began inverting in the second half of 2022 and has been widening ever since, continuously sounding the alarm for a downturn; even the widely accepted definition of a recession—two consecutive quarters of GDP decline—occurred in 2022. By 2024, the unexpected trigger of the July non-farm unemployment rate activated the recession indicator—Sahm's Rule.
However, the significant upward revision of the U.S. Q2 GDP (from an annualized quarter-on-quarter increase of 2.8% to 3%) clearly conveyed a major positive signal: the U.S. economy has not entered a recession, strongly refuting the analysts who had predicted the U.S. would enter a recession.
Furthermore, according to FactSet data, the frequency with which CEOs of U.S. listed companies mentioned the word "recession" in conference calls is at its lowest level in nearly three years.
The recession argument being debunked also reveals a harsh fact about the game of predicting economic downturns: recession indicators are not perfect and may never be.
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"It's really hard to read the economic situation now," said Duke University professor and Canadian economist Campbell Harvey, the inventor of the inverted yield curve indicator, in a recent interview with Yahoo Finance. "The economy is very complex... we are unlikely to get a perfect indicator."
Since 1968, there have been 8 economic recessions, and the yield curve has successfully signaled 8 times in advance. However, since November 2022, the indicator has been in the red, and Harvey acknowledged that its unbeaten record may have come to an end.
"It's really hard to read the economic situation now," said Claudia Sahm, the creator of Sahm's Rule, a former Federal Reserve economist, and current chief economist at New Century Advisors.
After the July non-farm unemployment rate triggered Sahm's Rule, recession fears quickly spread in the market. However, Sahm later stated in an interview that Sahm's Rule has become somewhat ineffective and does not prove that the U.S. economy has already fallen into a recession.Sahm believes that the current rise in unemployment is not due to a weakening demand for workers in the market, but rather due to an increase in labor supply. For example, the surge in immigration to the United States after the pandemic has promoted the recovery of the job market, leading to an increase in unemployment, which can no longer be used as a recession indicator for reference.
Sahm also said: "In fact, I don't know how much of this is caused by immigration and how much by weak demand... or both."
Predicting a recession is like rolling dice.
Both economists face the same challenge: with a very small sample size, these recession indicators may trigger false alarms.
"We have made 8 observations since 1968," says Harvey, "and that's it. With just 8 observations, you can't do much."
It's worth mentioning that looking at the data alone may not reveal some worrying signs behind an economic recession. Pulitzer Prize winner Steven Pearlstein stated that most of the recessions in recent years have been the result of the bursting of financial bubbles, "and these economic data do not really show that," says Pearlstein.
Harvard economist and former Chairman of the Council of Economic Advisers under Obama, Jason Furman, jokingly said: "Almost all economic indicators that (successfully predict recessions) cannot successfully predict the arrival of the next recession."
He added that predicting a recession is like rolling dice. If a 1 is rolled, there might be a recession; if a 2-6 is rolled, things might improve. Sometimes the likelihood of a recession may be higher, but it can never be certain.
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