A look back at 2023: The recession that wasn’t.

Over my entire professional career (starting in 1977) I have not seen a downturn that was so anticipated fail to materialize – until 2023. Instead of a recession, real GDP growth is estimated to have been a solid 2.9 percent (using the Atlanta Fed’s most recent estimate of 2.3 percent for Q4 growth). Instead of monthly declines, nonfarm payroll employment averaged an increase of 189,000 per month over the first 11 months of the year – slower, but still well above trend. And instead of rising sharply, the unemployment rate was below 4.0 percent all year and was a low 3.7 percent in November.

 

What did the prognosticators miss? The vast majority of recession outlooks were premised on historical relationships that had a high degree of accuracy in predicting economic downturns. Most importantly, based on data for the post-WW II period, whenever the yield on the 3-month Treasury note exceeded that of the 10-year note (an inverted yield curve) for more than a month or two, recessions have always occurred within about a year (with a single exception in the mid-1960s when the Fed reversed course and quickly lowered short-term rates). This specific measure of the yield curve shape inverted in October 2022, suggesting that a downturn toward the end of this year was likely. Moreover, the magnitude of the inversion was by far the largest since at least 1982, reaching nearly 1.9 percentage points in May 2023; and this inversion has been long-lasting.

While there is no sign of a recession currently, economic activity appears to have slowed in the fourth quarter. As noted, the most recent estimate for real GDP growth is 2.3 percent – down from the third quarter’s 4.9 percent. Taking the average of October and November (to account for the UAW strike), job growth eased to an average of 174,500 – well below the average of the past 1, 2, or 3 years.

Financial markets ebbed and flowed with expectations for monetary policy changes from the Federal Reserve. After much volatility but no significant trend movement, the yield on longer-term Treasury notes rose sharply starting about mid-year as expectations for Fed easing slipped – culminating in a sell-off for the ages in October. The 10-year Treasury note yield surged by 40 basis points in just over a week, climbing to nearly 5.00 percent on October 19 – the highest level since June 2007. But signs of slower growth after that, plus market perceptions of a dovish turn by the Fed at the December FOMC meeting as inflation continued to cool, resulted in a huge rally – with the 10-year Treasury note yield down to a bit below 3.80 percent only two months later.

Continued at link below:

https://www.cumber.com/market-commentary/2024-outlook-economy-job-markets-inflation-more