Fed, Businesses, and Others See Recession Possibilities Fade

At the annual Federal Reserve’s retreat at Jackson Hole, Wyoming, multiple economists have told MarketWatch that they didn’t expect a recession.

It’s part of the back-and-forth of the last few weeks. Pinning down the odds of a recession has become a difficult occupation. Concerns over a potential economic crisis started in early August when the jobs report for July came in well under expectations and the big annual downward jobs revision doubled concerns about the economy’s strength.

But the swing about the near future has shifted in a positive direction. “The underpinnings of the economy look good. Broadly speaking, things look pretty solid,” Karen Dynan, an economics professor at Harvard University, told MarketWatch.

While often a jump in the unemployment rate has been an indicator of a recession, former Fed vice-chair Alan Blinder told MarketWatch at Jackson Hold that “it is not really clear that that rule of thumb holds right now.” He thinks the chance of a recession is not much above the 15% chance that always exists.

The optimism isn’t a product only of an economic retreat. Fed Chair Jerome Powell said that with year-over-year inflation at about 2.5%, the “time has come for policy to adjust.”

“The direction of travel is clear, and the timing and pace of rate cuts will depend on incoming data, the evolving outlook, and the balance of risks,” Powell added during the press conference that followed the August Federal Open Market Committee meeting.

Businesses are also becoming more confident and speaking less of recession. Yahoo Finance referred to data from FactSet on earnings calls from June 15 to August 15, 2024. Only 28 S&P 500 firms mentioned recession, below the five-year average of 83 companies and the 10-year average of 60. First-quarter mentions in 2024 were 27.

“The very low levels of ‘recession’ mentioned in the just-completed second quarter of 2024 is a sign of management confidence in current and near-future earnings power,” DataTrek’s Nicholas Colas wrote in a client note, according to Yahoo Finance.

The Federal Reserve Bank of Atlanta tracks sentiment among companies. Business inflation expectations continue to drop. Currently, the year-ahead expectation of inflation is down to 2.2%. That has moved up and down slightly during 2024. But year-over-year unit cost growth remained at 2.6%. Sales levels and profit margins “compared to normal” decreased.

Signs like the decrease in sales and profits are a reminder that the economy’s future may be more complex than people assume.

“While many are rushing to call a soft landing, we remain cautious,” wrote Chris Zaccarelli, chief investment officer for Independent Advisor Alliance, in an emailed note. “We have been pleasantly surprised – as should anyone except the most vocal bears – that the economy has remained as resilient as it has and we hope for everyone’s sake that the labor market holds up and recession can be pushed off until 2025 or even later, but it is important at this time to take a balanced approach to investing and neither plan for an imminent recession, nor chase risk and get complacent just because the Fed will be lowering interest rates in less than a month.”