Investment Strategy Brief:
O’ Recession, Where Art Thou?

Below is a transcript of this week’s video.

Hi, this is Mike Reynolds with Investment Strategy at Glenmede.

Despite a higher-than-normal risk of recession, the U.S. economy has held up reasonably well through the bulk of 2023. In fact, the Atlanta Fed’s GDPNow forecast is calling for almost 5% real GDP growth in Q3. However, just because the economy is holding up well does not mean that recession has been successfully avoided. From a historical perspective, it’s not unusual at all for the economy to look okay right before the start of recession. Several recessions over the past century have seen real GDP growth accelerate just before falling off.

So what has been contributing to this relatively resilient expansion? Why haven’t we seen a recession yet? For one, personal income and consumer spending have held up reasonably well in the post-pandemic period and remain above pre-2020 trend levels, particularly on a nominal basis. This has been a key support for the consumer, which represents more than two-thirds of all economic activity in the U.S.

Additionally, the labor market has remained healthy, with the unemployment rate still near multi-decade lows. This is echoed by many alternative measures for the labor market, such as the ratio of the number of active job openings to those seeking jobs. Altogether, it points to a significantly tight labor market that’s helping to keep the economy humming along so far.

Another tailwind has been the arsenal of excess savings households built up through the pandemic, above and beyond pre-2020 trends. This has bolstered the spending power of consumers for some time. After excess savings peaked in mid-2021, the average consumer began to draw down cash piles to meet expenses. That’s helped to keep consumer spending higher, but the catch here is that spending boost may be fading. Now that those savings have largely been exhausted, that represents one less tailwind for economic growth going forward.

Just as those savings are getting tapped out, there are nascent signs of stress popping up in consumer loans. An increasing share of auto, credit card and mortgage loans are transitioning to early-stage delinquency after 30 or more days of nonpayment. While on an absolute basis, these figures are well below the last cyclically driven recession in 2008/2009, the trend appears to be moving in the wrong direction, suggesting consumers may be experiencing difficulty maintaining their spending at recent rates.

So how does all this inform the economic outlook? Recession appears to be the base case for later this year or early next. Historically, tight monetary policy tends to precede recession, but it often takes 1-2 years to work through the economy and induce an economic downturn. And while many obsess over broad indicators like GDP growth and employment, which have been holding up pretty well, these tend to be more coincident signals, telling investors where the economy currently is, not necessarily where it’s going. In contrast, Glenmede’s Leading Economic Indicator looks at more timely measures of economic trends to give a directional view on the trajectory of the U.S. economy. It includes more timely indicators such as consumer and business surveys, housing starts and building permits, and many others. Right now, that model is pointing to a likelihood of negative GDP prints within the next six months, suggesting that recession risk remains elevated. For investors, that means a defensive posture in portfolios remains warranted.

So to summarize, the U.S. economy is holding up decently well for now, which is not unprecedented before recessions. Keeping the economy afloat has been strong income and spending trends on a nominal basis, as well as a tight labor market. Large piles of excess savings have been a support to spending as well, but those piles have begun to dwindle and may be less of a consumption stimulus moving forward. This comes at the same time that households are increasingly entering delinquency on some debt payments. Altogether, despite the resiliency of the economy so far, leading indicators are still pointing to recession on the horizon, warranting a defensive posture in portfolios.

Thanks for listening! And please don’t hesitate to reach out with any questions.