If Recession Comes, Why It May Be Different This Time
Jonathan Baker - Jul 14, 2022
Headlines these days tend to focus on the stress the economy is facing and the potential for a recession (some even argue we may already be in a recession). People are rightfully worried about the state of the economy, as the continued impacts of supply chain disruptions stemming from the global pandemic, increased energy costs, and open conflict in Eastern Europe have put tremendous pressure on the global economy. However, looking back at the previous lasting recession connected to the Great Financial Crisis of 2008, there are some major differences. Even if the world stumbles into a recession, these differences tend to indicate that such a recession may not be as lasting or as deep as it was in 2008.
A good place to start is the labor market. Despite all the recession talk and fears, the labor market continues to be historically tight, with unemployment continuing to flatline at 3.6%. Wage growth has also stayed strong, coming in at 6.5% last month. In contrast, unemployment began creeping up in 2007 and shot up in 2008. These elevated levels ultimately persisted for years to come. Wage growth was 3.2% and falling in 2007 and wouldn’t rebound until 2015. This more robust labor market may allow for either a shallower recession or aid the Fed’s Chair, Jay Powell, to navigate the hope for a “soft landing” and avoid recession entirely.
Source: US Unemployment Rate (U-3) 2007-present, Ycharts, Bureau of Labor Statistics, gray areas represent US recessions
Consumer spending is the major driver of economic growth, representing approximately two-thirds of the U.S. GDP. While consumer sentiment is low in the face of fears of inflation, recession, and other crises, the reality is that consumers are in a stronger position than they were coming into 2008. Households have used the last few years of uncertainty to build up their savings, and as a result, measures of consumer health are much stronger. For example, consumer defaults rose sharply heading into the Great Financial Crisis (and stayed elevated for years). Currently, the same numbers are staying at low levels and show no signs of a dramatic uptick.
Source: 2006-Present, Ycharts, gray areas represent US recessions, S&P/Experian Consumer Credit Default Composite Index measures the default rates across autos, first and second mortgage and bankcards, and also offers investors a broader benchmark combining and measuring the default rates of all four indices included in the S&P/Experian Consumer Credit Default Indices.
What does this all mean?
The elephant in the room is inflation. The disruptions from the pandemic, conflict in Ukraine, and increased energy prices have caused inflation to jump to levels not seen since the 1970s. If inflation persists, there is a higher chance we will be pushed into a recession. The above factors tend to help alleviate the length and depth of a recession if such a recession were to materialize. In the meantime, it’s important to remember that the stock market and the economy are two different things. While markets have historically fallen at some point during a recession, they have also, on average, been positive over the whole course of the recession. The wise investor will look through any recession to the long-term opportunity of stocks at today’s prices, even in the face of scary headlines and recession talk.