Economic Outlook: Difference between revisions

Some of the most prominent leading indicators used in this analysis show signs of significant deterioration, and a high likelihood that the economy will enter a recession sometime after Q2/Q3 2023.  

Some analysis oppose to this idea due to the fact that the labor market is still strong, but is important to take into account that the labor market is one of the most lagging economic indicators. While unemployment is an important recession indicator, unemployment usually peaks long after the recession has begun and can last well into recovery. That's because the NBER (and others) say a recession is over when the economic contraction hits bottom and starts to rebound, not when the recovery is complete. In 2008, The recession began in December 2007 and ended in June 2009, according to NBER. Yet in April 2008, five months into the recession, the U.S. unemployment rate was just 5%, up only slightly from 4.7% six months earlier. Unemployment continued to rise to hit 10% by October 2009, four months after the official end of the recession and seven months after the stock market hit bottom.<ref>https://www.investopedia.com/ask/answers/032515/why-does-unemployment-tend-rise-during-recession.asp#citation-21</ref>

Is important to mention that even though leading indicators can provide a picture of the direction we can expect the economy to take in coming months, is not possible to derived from them the magnitude of the possible decline. But considering that some of numbers analized are at worst levels since years ago, the probability of being a serious contraction is higher than the alternative, especially with the FED narrative and actions to continue tightening while this contraction unfolds.

Also, according to the Sahm<ref>https://fred.stlouisfed.org/release?rid=456#:~:text=The%20Sahm%20Rule%20identifies%20signals,time%20Sahm%20Rule%20Recession%20Indicator</ref>, the US economy will be on a recession when the unemployment rate hit 4.1%, the FED projections shows a unemployment rate already of 4.6%, level above the rule threshold, and not in line when their narrative of a soft landing possible. The Sahm rule also shows that when the unemployment rate rises 0.5%  over the course of a year, it ends up rising by around 2% or more, which means there is a probability the US economy could end up with levels of at least 6%.

6% Unemployment is in line with some analyst scenarios of 6-7% following the serious decline in housing activity the economy is experiencing, and even though is still a low level compare to other times in history, is the rate of change in the indicator that will determine how bad the recession will be, since the rate of change of the economy (GDP) will move according to the rate of change of the economic variables.