Beware the 'No Recession' Call: Economic Data Lags Reality
Economists no longer expect a recession. Such was according to a recent WSJ survey of Wall Street economists. To wit:
“In the latest quarterly survey by The Wall Street Journal, business and academic economists lowered the probability of a recession within the next year, from 54% on average in July to a more optimistic 48%. That is the first time they have put the probability below 50% since the middle of last year.”
The Federal Reserve also suggests the same. Following the September FOMC meeting, the Federal Reserve reiterated its “higher for longer” mantra and upgraded its economic forecast to include a “no recession” scenario.
“Fueling the optimism are three key factors: inflation continuing to decline, a Federal Reserve that is done raising interest rates, and a robust labor market and economic growth that have outperformed expectations.” – WSJ
The problem with that optimism is that it is entirely based on lagging economic data.
More importantly, that lagging data is subject to relatively large negative revisions in the future.
Furthermore, as discussed previously, tighter monetary policy’s “lag effect” is still working through the system. As Michael Lebowitz noted:
“Changes in interest rates only impact new borrowers, including those with maturing debt who must reissue debt to pay back investors of the maturing bonds. Accordingly, higher rates do not impact those with fixed-rate debt that is not maturing. The lag effect occurs due to the time it takes for the new debt issuance to bear enough weight on the economy to slow it down.“
In other words, if the average delay between the final rate increase and recession is 11 months, and the last hike was in July 2023, the risk to forward expectations is quite elevated.
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