Despite a surging stock market, plenty of economists still expect a US recession within the next year. They often cite falling leading indicators, an inverted yield curve, or a decline in savings as reasons to be bearish. Here’s what market veteran Ed Yardeni has to say to about five economic concerns. Loading Something is loading.
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Even though the stock market has surged nearly 30% since its mid-October low, there are plenty of economists who expect a recession to hit the US economy within the next year.
They often highlight five reasons why they still can’t let go of their recession forecast, like an inverted yield curve, for example.
But according to market veteran Ed Yardeni, there’s a bullish response to the concerns most often recited by bearish economists.
These are five reasons why some economists still expect a recession, and Yardeni’s bullish response to each one, according to a Saturday note.
1. Falling leading indicatorsSince the Index of Leading Economic Indicators peaked at a record high in December 2021, it has fallen 9.4% through May. This index has correctly anticipated the previous eight recessions with an average lead time of 12 months.
Yardeni’s Response: “We’ve previously shown that the LEI is biased, given more weight to the manufacturing than the services sectors of the economy.”
2. Inverted yield curveInverted yield curves signal that investors think that the Fed’s tightening of monetary policy will ultimately result in a credit crunch and recession. The inversion of the yield curve has a solid track record in predicting future recessions.
Yardeni’s Response: “The yield curve inverted last summer. It once again correctly anticipated a banking crisis, which occurred in March. What is different this time, so far, is that the Fed responded very quickly with an emergency bank liquidity facility, which has worked to avert an economy-wide run on the banks and a credit crunch.”
3. Declining money supplyA sharp decline in M2 growth, which is a measure of money supply, has led some economists to sound the alarm that monetary policy is already tight enough to cause a recession.
Yardeni’s Response: “We’ve addressed this issue in the past, and we still aren’t alarmed. The money supply as measured by M2 climbed $130.9 billion in May after falling the prior nine months by $1.0 trillion. It is down $897 billion since it rose to a record high during July 2022. It is down 4.0% year-over-year. However, M2’s decline follows a $6.3 trillion (41%) increase from January 2020 through its record high. M2 still remains about $2 trillion above its pre-pandemic uptrend!”
4. Running out of excess savingsMany economists expect consumers’ excess savings from the pandemic to be fully depleted by the end of this year, which should hurt consumer spending.
Yardeni’s Response: “The yearly change in M2 has been closely tracking the 12-month moving sum of personal savings, suggesting that there’s still plenty of excess savings left… we reckon that the excess liquid assets held by the Baby Boomers alone ranged between $1.0 to $2.0 trillion at the end of Q1.”
5. Tightening monetary policyThe Federal Reserve has hiked interest rates 10 times over the past 14 months in its fastest increase ever. At the same time, it has been reducing its balance sheet by about $100 billion every month.
Yardeni’s Response: “Tight monetary policy has been offset somewhat by very stimulative fiscal policy. In the past, fiscal stimulus usually occurred at the tail end of recessions or even once they were over. This time, plenty of fiscal stimulus has been enacted before the next recession. That’s another reason why the next recession has been a no-show so far.”