It is still a close call as to whether or not the US economy will enter a recession. While we believe that the risks for a mild recession remain, we think slow growth will be the most likely outcome.
As we head towards the end of the year, economists will begin penning their outlooks and suggested portfolio allocations for 2024. It appears there are still two consensus projections for economic growth next year: a soft landing or a recession. To be clear, we are biased to the former over the latter, but there is considerable uncertainty around the outcome.
While no two recessions are the same, looking at previous recessions could help inform forecasts for today’s economic outlook. Our recession heatmap provides several interesting takeaways:
- Consumption: While consumption accounts for roughly two thirds of economic activity and typically contracts during recessions, investors may be surprised to see that there have been mild-to-moderate recessions where consumption remained positive.
- Private investment: Capital spending tends to correct materially during recessions, likely driven by the very cyclical nature of inventories and business fixed investment. Housing, on the other hand, tends to be stable with the sector showing modest declines on average.
- Net exports: The US trade balance has often made a positive contribution to growth during recessions. The reason could be because demand for US goods increases relative to US domestic demand when other major economies around the world are stronger than the US economy. However, the US trade deficit tends to worsen when the economy is growing. Therefore, a more likely reason may be that the decline in domestic US demand during a recession curtails imports to a greater degree than exports.
- Government spending: Fiscal support and thereby deficits tend to increase during recessions to offset a weakening economy.