Tuesday, February 6, 2024

Has Recession Been Officially Called Off?

Click here to read the original Cautious Optimism Facebook post with comments

6 MIN READ - The Cautious Optimism Correspondent for Economic Affairs and Other Egghead Stuff ventures into treacherous waters: attempting to call a recession.

(click to enlarge)

“In the postwar era, monetary policy tightening to contain inflation has been 𝘵𝘩𝘦 most common cause of recessions.”

-Claudio Borio, Monetary and Economic Department Head
  2017 Bank of International Settlements general meeting

CO Nation may recall that in late 2022 the Economics Correspondent wrote that history informs us the Federal Reserve’s recent series of aggressive interest rate hikes makes an impending recession extremely likely. Aside from charts showing the temporal relationship between rising rates and recession, the Correspondent detailed that in the Fed-era (1914 to present) no inflation of greater than 5%, when countered by higher interest rates, has ever failed to produce a recession shortly afterwards.

Yet here it is February of 2024 and there’s no recession. 

Moreover the economy looks mostly OK, unemployment is low, everyone on TV is now guaranteeing a “soft landing” and claiming “there is no recession on the horizon,” the stock market is hitting new highs (not inflation adjusted), and talk of future rate cuts has experts saying we have dodged a recession for good and happy days are here to stay.

So has the Correspondent changed his mind?

Nope, not yet at least. In fact, all the above media punditry, good economic indicators, and stock market records are perfectly consistent with past recessions going back to the 1980’s.

First let’s start with American recessions themselves.

No matter how bad America’s politicians have been, in the Federal Reserve era nearly none of the nation’s eighteen recessions have ever been started by a president or Congress. The most common cause, as Claudio Borio points out, has been tighter monetary policy by the central bank.

Rising interest rates have unquestionably been the cause of twelve of America’s eighteen recessions since the Fed opened its doors in 1914. As for the other six, The Depression of 1937-38 is one of two ambiguous slumps since it was preceded by a coincidence of Fed tightening plus Congress/President Franklin Roosevelt enacting both a major tax increase and far-reaching union wage floors in 1936—all in the middle of the Great Depression.

The other questionable one is 1973-75 when the Fed had raised interest rates 7.5 points right before OPEC launched its oil embargo against the United States.

Covid and lockdowns caused one more (2020), and the remaining three are minor, very old, and lightly studied events (1918, 1923, 1926) although all three were also preceded by interest rate hikes. 

Note: Although politicians have rarely started recessions in the last century, once a recession is underway elected officials have an enormous impact on how much worse and longer recessions last. For a good contrast look at the diametrically opposite policy responses during the Depression of 1920-21 and the Great Depression of 1929-1946. The first was over in nine months, the other became the worst economic cataclysm in U.S. history. Also compare the opposite responses to the 1982 and 2008 recessions, the former with massive deregulation and tax cuts, the latter with massive new regulations and a tax increase.

Now let’s look at today (see chart above).

In 2022-2024, the Fed’s rapid increase in interest rates looks a lot like all the others of the last forty years. So if it’s a carbon copy then why no recession yet?

Notice in the first chart that no recession (shaded area) has ever begun immediately when the Fed begins hiking. That’s because, as both Milton Friedman and recently Jerome Powell have said, monetary policy has “long and variable lags” before it's felt in the real economy.

Going back to 1985 the lags can be measured as follows:

Time from final rate hike to official start of recession.

1989: 15 months

2000: 9 months

2006: 17 months

The last rate hike of the recent Fed campaign was in July of 2023. Therefore the range of 9-17 months correlates—while not a perfect predictor—to a recession beginning anywhere from April 2024 to December 2024.

In other words, students of recent history know to be more patient than the headline-jockeying talking heads in the media.

Keep in mind as well that on the official start date of a recession few people notice or “feel” like they’re in a recession. It’s only six or nine months later, after unemployment has risen sharply, that the NBER releases its statement declaring “the recession officially began two quarters ago,” to which the public by then moans “tell me something we don’t already know.”


But what about low unemployment and the booming stock market?

The Correspondent has included three more St. Louis Federal Reserve charts comparing the Fed Funds policy interest rate against the broad Wilshire 5000 stock market index from 1988-1991, 1999-2002, and 2004-2009 (URL links at bottom of article).

Note in all three cases, all while interest rates were rising so was the stock market. During each of those events Wall Street pundits on TV were saying “Rising rates are a sign of a strong economy. Buy now.”

And once rates peaked or even started to come back down, the stock market was still setting new record highs (Exception: 2000 which was the greatest stock market bubble in American history, where the market peaked two months before the last rate hike).

What was happening in the news while the market was hitting new highs in 1990, 1999, and 2007?

The Correspondent personally remembers two of those three. Every day on the business news Wall Street strategists were saying:

”The rate hikes are over and the economy is doing fine. All the talk about recession has come to nothing."


“The Fed is now cutting rates. Recession fears are in the rear view mirror and with lower interest rates the economy and market will boom even more!"

In all three cases, within 2-10 months of notching the last stock market record high, recession began and the market dived into bear territory, giving new investors a rapid dose of heavy losses.

In 2023 and 2024 history is so far repeating itself. Today, just as in 1990, 1999, and 2007, we hear every day on the news: ”People have been talking about recession for a year and a half and it hasn’t happened. They’ve been proven wrong. It's time to go all in before the real economic boom.”

The mistake these people made in the past was they didn’t realize it would take 9-17 months after the last rate hike for the recession to begin. Or that it would take 2-3 years after the first rate hike, when recession talk started up, because raising rates from zero to 0.25% or 0.5% isn't going to cause a recession—raising them to 5.25% will, but that took the Fed over a year to get to.

But due to lack of patience and not studying history they tired of waiting and declared the coast was clear--just months before the economy slumped.

And low unemployment is the easiest of all to explain. Included in the final URL at this article’s end is the unemployment rate going back to the 1980’s. Note that at the official beginning of every recession unemployment is still very low and only starts to rise sharply once the recession is already underway. Just as we all hear in the news (correct this time for once), unemployment is the notorious “lagging indicator” and rarely warns the public that recession is around the corner.

Now does the Economics Correspondent guarantee a recession? That would be pretty dangerous, but he will say recent events in no way shake his convictions because everything is playing out exactly as it has in every recession going back to the mid-1980’s. That includes all those pundits declaring “the economy is great, there will be no recession” not to mention lots of journalists trying to run cover for Joe Biden’s re-election chances.

So sure, you never say never, there’s always a first time for everything, and there’s always a tiny sliver of a chance things will be completely different this time. But the odds are so small that he’s not changing his opinion, in part because as a student of economic history he hasn't yet seen any reason to.

And what will it take for the Correspondent to say “I was wrong?”

The window for the start of recession is roughly April-December 2024, and it could take a couple of extra months as a cushion. Plus people rarely know a recession has started when it actually starts. So if there’s still absolutely zero sign of a recession once we get into the summer or fall of 2025 (about 24 months after the last rate hike) the Correspondent will gladly admit he got this one wrong, although he wouldn’t have done it any differently were it all to happen again.

ps. If a recession pops up in 2030, seven years after the last rate hike, the Correspondent will definitely not say “See, I was right all along.” Two years later is historical cause-and-effect plus those “long and variable lags.” Seven years later is just a broken clock that was right twice a day.

Additional charts:

Fed Funds versus stock market 1988-1991.


Fed Funds versus stock market 1999-2002.


Fed Funds versus stock market 2004-2009.


Unemployment rate before recessions.


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