It is likely the depth and severity of the 2008/09 crisis are contributing, through something akin to PTSD, to the deafening drumbeat of recession calls. The interviews out of the WEF in Davos are almost unanimous that a recession is coming in the next 18 months or so. David Solomon, the new Chairman and CEO of Goldman Sachs put the odds at 50% for 2020. It is by now certainly the consensus view, and judging by the interest rates curve, it is in market prices. We think this has gone a ways too far. Sure, there are paths that lead to that outcome, it is perfectly possible. But 50%? Or a base case from here? We think that’s a stretch.
First, the markets have eased financial conditions considerably over the past few months. This alone may be enough. Recessions are often caused by either the perception or reality of tight Fed policy, and that tight policy rate being viewed as a Fed error. This Fed seems hyper focused on this and given the cacophony of Fed speak this past couple of months reiterating patience and pauses, as well as the drop in yields, an error seems unlikely. If the Fed were already in error, that error persisting seems unlikelier still.
Second, a recession can come from a quick contraction in sectors or parts of the economy that are out over their skis. That picture doesn’t fit the consumer; savings rates are high, and the corporate sector has a strong surplus. Real interest rates are still low, credit markets are open, housing needs and demographics are decently supportive – at least. Maybe the cyclical businesses that are starting to pop up more are less resilient, but the expansion can likely support these things in a self-sustaining way for a while longer yet. Not that it necessarily will, just that predicting the end already seems a bit much. We hope it doesn’t become reflexive and feed on itself. A trade resolution, or at least an interim climb-down, as well as Europe finally getting its act together and a Brexit deal may lead to a sign of relief and a growth inflection upwards. To our eye, that’s at least as likely as a near term recession, but doesn’t generate the same number of clicks.