Fears of the US economic recession: Should we worry about it?

Many analysts can’t say for sure whether one is likely to happen soon, but they do believe that even if such a downturn does take place, the market should not be as fearful as it seems to be at the moment.

This might be a strange thing to say. After all, shouldn’t we all be scared about a recession? The answer to this depends on what sort of recession we are talking about. Deep and/or protracted recessions are clearly destructive, as they are likely to be associated with things like a surge in unemployment and a deterioration in the budget as the automatic stabilisers kick in. But is that what we are likely to be talking about in the US?

It seems very unlikely unless, that is, a recession is caused by a large negative shock like another pandemic or a financial crash. On the more likely scenario that the economy just drops slightly below the zero line for a while, it is hard to suggest that this would be catastrophic.

In fact, we should not forget that the US was in recession as recently as the first half of 2022, if, that is, we were to define a recession in the US the same as everyone else, which is two consecutive quarters of negative growth. But the narrative even in 2022 was that the economy was quite robust, with the unemployment rate, for instance, ending 2022 half a percentage point lower than where it started. And don’t forget that the Fed was undertaking some fairly aggressive monetary tightening starting from March 2022 in response to rising inflation, so it clearly felt that the economy was not in mortal danger.

Now clearly the US defines a recession in broader terms than just two quarters of negative GDP and this usually means that downturns have to more serious than just two quarters of negative growth. The Business Cycle Dating Committee of the National Bureau for Economic Research (NBER) never labelled the H1 2022 downturn as a recession and we suspect it will do the same in the near future if the economy suffers a similar sized dip.

On this point, it is worth noting that economic growth in developed countries has endured a structural slowdown, particularly in the wake of the 2008/09 global financial crisis. The jury is out on whether this is over, even in the US. In purely mathematical terms, if quarterly growth is mostly lower than the levels we might have seen in the pre-GFC period, then it stands to reason that temporary GDP dips below the zero level are more likely. In the UK, for instance, we saw a recession in the second half of last year, but GDP was only just below the zero line, and Germany has only just managed to avoid a recession by the skin of its teeth in recent years.

Steve Barrow, Head of Standard Bank G10 Strategy, said the closer ‘natural’ growth is to zero, the more often mild and temporary recessions can occur. And that’s important because mild downturns like this don’t really ‘feel’ very different to periods of growth; they don’t feel like a recession, often because there is no surge in unemployment. And that, in turn, does not lead to the wholesale destruction of consumer and business confidence that can turn a downturn into a deep recession. In fact, right now, the tightness in labour markets in the US and elsewhere would make any recession feel even less like a recession than usual and may even be helpful in squeezing that last bit of inflation out of the system.

“We are not saying that a recession in the US or anywhere else is good, or might be needed. Policymakers should strive to avoid it, as they surely will. But the point we are making is that it is not the end of the world if they fail, at least not in terms of the sort of destruction we might expect in terms of growth and riskier asset prices like equities. In short, there is a risk that the market talks itself into a very gloomy/recessionary scenario that hits asset prices hard when, in reality, even if the recession call is right – and we are not sure it is—the outcome will not be as bad as feared," said Steve Barrow.