Where’s The Recession?

Many of the tried-and-true recession indicators are screaming recession. The yield curve has been inverted for 12 months and the money supply (M2) has fallen by 3.7% in the same period.

So… where is it?

This is perhaps the most widely predicted recession in history. But like we’ve said in previous commentaries, there’s no bullet proof method of predicting events in the market or the economy. And in our 24/7 news cycle it’s often important to beware the headlines and take a step back to consider the entirety of any given market scenario.

Let’s look at some of the factors that have likely forestalled the recession.

Monetary Policy

Money supply is an accredited recession indicator, where shrinking supply usually precedes a recession.

The money supply has declined by 3.7% over the last 12 months, which on the surface seems definitive. But let’s expand our scope to put the reduction into context.  

The money supply has increased at a 9.3% annual rate over the last 3.25 years, compared to its long-term growth rate of 6.4%. The recent 12-month decline simply brings money supply growth down toward its long-term trend. As such, the data point may not be as reliable a recession indicator as in the past.

The Yield Curve

Interest rates across all maturities have moved higher over the last 18 months, with short-term rates exceeding long-term rates. The 2-10 year yield curve remains inverted by around 100 basis points, with a 2 year yield of around 5% and a 10 year yield of around 4%.

The short end of the curve is influenced by the Fed. As they pushed rates higher the 2 Year Treasury yield followed. The 10 Year Treasury Bond index has risen to a lesser extent and seems to be pricing in a potential slowdown in the economy.

Cumulative quantitative easing is working counter to the Fed’s higher short-term rates.  The Fed’s balance sheet is roughly $8.5 trillion – two times the baseline growth rate of 4.4% per year and double the estimated “appropriate size” for the Fed to carry. The bloated balance sheet keeps liquidity in the system and has kept longer-term interest rates lower – contributing to the inversion of the yield curve.  

While the negative yield curve has been a reliable recession indicator in the past, two things suggest it may not be as reliable at predicting a recession today – rates are considerably lower than during the inverted curves of the 1970’s and 1980’s, and the bloated Fed balance sheet contributes liquidity to the economy.

Government Spending

Elevated government spending has played a major role in propping up the economy through and after the pandemic.

Federal outlays are 26% of GDP, up from the historical 20.6% and $1.6 Trillion above average. Typically, this increased level of spending is only seen in periods of recession, as we saw in the early 1980s and the last financial crisis. Today’s elevated spending continues to be a stimulus for the economy.


Employment is a lagging recessionary indicator. The labor market has remained stronger than many anticipated (the unemployment rate today is exactly where it was when the Fed started to raise short-term rates).

There’s a lot of cushion in the labor market today, which suggests that employment will continue to be relatively strong and will continue to help the economy avoid recession. 

Consumption (And Strength Of The Consumer)

The consumer has, so far, shown resilience while being forced to pay higher prices for goods and services.

Core PCE price inflation has remained “stuck” in the 4% – 5% range over the last two years. However, consumer spending has grown at an average annualized rate of 7.8% in the same period.

Consumers are getting less for their dollars, but they aren’t balking at the higher prices – a positive indicator that suggests consumers, as a whole, aren’t on the brink of financial disaster.

That said, higher interest rates and the higher cost of servicing debt may begin to place a greater strain on those that rely on credit to fund essential purchases. Credit card interest rates have jumped from 15% to 22% over the last 12 months, a significant increase that could edge lower-income consumers toward default.

Our Conclusion On The Recession

As we’ve said in previous commentaries, we experienced a mild technical recession in 2022 with two quarters of negative GDP growth. And despite the Fed’s resolve to fight inflation, we have consistently suggested we would not experience an economic recession in 2023 (due to the factors discussed above). Looking into 2024, the outlook is less clear. We will be monitoring the historically reliable recession indicators as well as the factors that have likely precluded the recession for the time being.

At the end of the day, we’re less worried about recession odds and more concerned about finding fundamentally sound investment opportunities in the market today. The positioning in our equity models has remained relatively unchanged over the past three years, and there’s reason for that. Through the short-term trends and noise, very little has changed in the market from a fundamental standpoint. We hold to our conviction that, in aggregate, the stock market is overvalued, and that Healthcare remains a standout with a valuation around its historical average and double digit forecasted earnings growth.

Our equity portfolios remain focused on large cap companies and tilted toward defensive sectors (like Healthcare), with an emphasis on earnings and balanced sheet quality.

In our fixed income portfolios, we remain positioned in short-term and high-quality debt instruments to reduce the risk to principal in a rising rate environment.

As always, the team at AAMA will diligently monitor the economy, the market, and the market’s underlying sectors through our time-tested fundamental market pricing and sector valuation methodology. We’ll keep you informed as things are updated, but we encourage you to reach out to us if you have any questions. We’d be happy to speak with you.

Want a deeper dive into the market? Click here to view our full Q2 market commentary.

The information and opinions in this report have been prepared by the investment staff of Advanced Asset Management Advisors (AAMA). This report is based upon information available to the public. The information herein is believed to be reliable and has been obtained from sources believed to be reliable, but AAMA makes no representation as to the accuracy or completeness of such information. Opinions, estimates and projections in this report constitute AAMA’s judgment and are subject to change without notice. This report is provided for informational purposes only. It is not to be construed as a recommendation to buy or sell or a solicitation of an offer to buy or sell any financial instruments or to participate in any particular trading strategy in any jurisdiction in which such an offer or solicitation would violate applicable laws or regulations.

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