For over 2 years now, economists and other experts have been warning about an impending recession that has, so far, failed to materialize. I’d like to dive into the data to try and determine whether we are still on track for a recession, or if this time, the warnings were off the mark.
Inflation
Since early on during the COVID-19 pandemic, people have been more aware than ever of rising inflation. Whether it was the price of eggs, bacon, or gas, there have been thousands of articles and news stories about the rapidly increasing prices. Indeed, looking at the numbers, we had some of the highest inflation rates since the 1980s.
The Consumer Price Index (CPI) for all Urban Consumers is the most widely accepted metric for inflation and is publicly available via the bureau of labor statistics. After loading this data into Athenic AI, we can easily ask to see the year over year growth rate of the CPI a.k.a the rate of inflation. We can see that the rate of inflation has climbed rapidly through 2021 and 2022 capping at nearly 10%, the highest since 1982. It is no coincidence that in the early 1980s, the US experienced a terrible recession. Recessions are often the result of actions taken to combat inflation, in fact, for every recession since then (early 90s, early 2000s, 2008), you can see a corresponding spike and decline in inflation rate.
Federal Fund Rate
If growing inflation is a symptom of an economy headed for (or already in) trouble, the Federal Funds Rate can be seen as a sort of treatment. If we load the historical federal funds rate data into Athenic AI (also publicly available from the Fed), we can plot the fund rate against the rate of inflation to see a pretty clear picture.
In observing the inflation rate's steady climb throughout 2021, the Federal Reserve finally intervened in early 2022, raising the Federal Funds Rate. The effect was immediate, with the inflation growth rate swiftly declining in the periods thereafter. This mirrors the Fed's actions in 1980, which were followed by a significant recession. In fact, most instances of such rate hikes have been followed by recessions, albeit of varying severity.
With that in mind, it might seem logical to predict an impending major recession. Despite this, and despite many predicting such an outcome over the past two years, a significant recession has yet to occur.
What's different this time?
There is one obvious confounding factor that was not present in the 1980s or 2008 recession – COVID-19. The pandemic had a massive impact on all of our lives and it’s an impact that has made many things unpredictable. In the early days of the pandemic, the economy was hit with massive supply chain issues. Goods like toilet paper and hand sanitizer were nearly impossible to find, prices of many household items sky-rocketed, whether it was eggs or exercise equipment. And amidst the actual supply and demand based price hikes, many companies took the opportunity to hike up prices even further, since consumers were getting used to higher prices (many of which have not come down since).
The pandemic certainly had a massive impact on inflation, and using Athenic AI to plot COVID-19 deaths (units of 10k) vs. inflation illustrates the relationship clearly. But a big difference between the pandemic-induced inflation and regular inflation is that investors knew that the pandemic-induced inflation would be temporary. It’s not very often that economic indicators have such a clear cause and effect, and that may have served to mitigate the effects that rising inflation tends to have. Uncertainty is one of the biggest ways that inflation can lead to rising unemployment and other issues, and while the pandemic brought its own uncertainties, there was at least some level of confidence that things would get better.
What if it just hasn't hit yet?
The goal of the Fed adjusting rates is to stabilize the economy, preventing the massive booms and busts of the past. It isn’t too far-fetched to think they might have gotten it just right for once.
After loading up the historical unemployment data (also from bls.gov), we can see that despite the unprecedented levels that COVID-19 took us to, we’ve managed to recover to pre-pandemic levels with 2022 being a steady decline and 2023 staying mostly stable around 3.5% to 3.7%. If we were truly headed into a recession right now, we would have expected this number to be climbing.
In the end, it’s entirely possible a recession is on the near horizon. Anyone who claims to perfectly know when a recession will come is not someone to be believed. That said, for now the signs seem to be pointing towards continued growth, so feel free to take a breath.
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