Can we avoid a recession this cycle? In my opinion, this question is a bit misleading. A recession cannot be avoided, but it can be delayed. In this sense, we can avoid a recession in 2024. But if it is postponed, it may happen, for example, immediately after the US presidential elections, e.g. in Q1 2025.
For instance, large spending in the form of a high fiscal deficit may keep the economy from entering a recession for many quarters, but at the end of the day the effect should be temporary, if only because deficit spending usually is not productive in aggregate and does not increase the wealth or prosperity of an average consumer.
Where do these thoughts come from? We're just getting more data points for the most historically proven leading indicators. Yesterday we got the Richmond Fed PMI, on Monday the Leading Economic Index (LEI), previously the Philadelphia FED PMI and New York FED PMI. Today we will get the flash PMIs for January 2024.
Figure 1 to 3 show the three regional PMIs. Figure 4 shows the LEI.
But it seems that these indicators do not work in the current cycle because they have been pointing to a recession that never happened.
So why don't they work?
First of all, the legacy of the pandemic has not yet been fully behind us. Secondly, most of these indicators are based on the industrial part of the economy and do not reflect well the current strong services part. But that's why we call them leading, because it is the industrial/goods part of the economy (not the services one) that has historically led the cycle.
Comments