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Are we there, yet? Navigating the road to recession

September 27, 2023 by The Trust Company of Tennessee

In the world of economics, the pandemic aftermath has shifted how we perceive recessions. While two quarters of contracting gross domestic product (GDP) were noted, key indicators like consumer spending, industrial production and unemployment remained strong during the recovery.

Miranda Carr, CFA®
Chief Investment Officer

Initial forecasts hinted at a 2023 recession, but recent shifts have delayed recession calls to 2024. Furthermore, an increasing number of economists are now indicating that the United States could potentially avoid a recession entirely. This hope arises from the resilient U.S. consumer, a robust labor market and disinflation.

The Federal Reserve’s timing in raising rates has been criticized, yet those efforts have been successful in curbing year-over-year inflation. Headline inflation has fallen from a peak of 9.1% in June 2022 to 3.3% in July 2023.

Looking forward, futures markets and the Federal Reserve agree that we are close to the terminal federal funds rate – the final interest rate that the Federal Reserve aims to achieve at the end of a monetary loosening or tightening cycle – and expect rate cuts to begin at some point in 2024.

In the past, the Federal Reserve has cut rates in response to economic downturns. The prospect of upcoming rate cuts has resulted in the emergence of an inverted yield curve, which occurs when short-term bond interest rates have surpassed those of longer-term bonds. It is important to highlight that the yield curve has a remarkable history of effectively predicting recessions.

Despite recession calls and an inverted yield curve, nearly all asset classes have positive year-to-date returns. Impressively, U.S. large cap equities gained 16.9% in the first half of 2023. Consistent gains by mega-cap corporations propelled indexes. The top seven firms in the S&P 500 returned over 60%, while the remaining 493 companies returned 5.8%. Market excitement surrounding artificial intelligence dominates the narrative for equity performance this year.

We’re not “there” yet but will continue to closely watch the indicators and economic climate to help clients navigate this road and make the best financial decisions. 

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