Is the U.S. Already In A Recession?
posted August 4, 2024
Unbeknown to most in the public, a group of eight economists from the nonprofit National Bureau of Economic Research is the official arbiter of US business cycles. Given its opaque deliberations and indeterminate meeting dates, it’s not surprising that both Main Street and Wall Street have resorted to a whole host of data to predict such cycles in a timelier manner.
The release of notably weaker-than-expected July jobs report this past Friday has ignited some buzz on one such indicator—the Sahm rule. Triggered in every recession since 1970, the rule holds that a recession is almost always already underway, if the three-month average unemployment rate is 0.5% higher than the lowest point in the preceding 12 months. The Rubicon was crossed for the first time since 2/2020 when Covid began.
How significant is this event?
In deciphering the strength of any economy, a panoply of indicators is required to make a more accurate assessment. Currently, the Sahm rule’s warning of a slowdown in the economy is unmistakable. That said, one would do well to avoid overstating its stand-alone value at present, when: 1) the sample size is relatively small (only 8 recessions since 1970), heightening the risk of correlation-causation fallacy; and 2) the distortions from the unprecedented Covid-related fiscal and monetary stimuli totaling at least $10T, or 40% of annual US GDP, have yet to be fully understood.
Juxtaposed against this potential flirtation with recession, the Fed once again finds itself in an unenviable position. While inflationary measures have been trending lower, they are not near the central bank’s stated goal of 2%. Notwithstanding, the Street is now anticipating at least one full percentage point in rate cuts between now and year-end, as fears of economic deceleration grip investors.
While the term “curated” has been used so frequently as to become hackneyed, the idea that any investment portfolio should be tailored remains perpetual and immune to fads. How’s your portfolio positioned in this macro environment?