Googling “US economy” recently, I got the following headlines as the top two results:
“US Economy Is Doing Better than Americans Think”
“Famous Economist Who Predicted 2008 Recession Issues VERY Grim Warning over Future of the US Economy”
Such is the challenge in evaluating the health of the economy in real time. Economic indicators, unlike markets, are backward-looking. The National Bureau of Economic Research (NBER) tends to declare recessions on a lag. The 2020 recession was declared in June, but later determined to have ended in April—two full months before the start was announced.
Part of the uncertainty may stem from the fact that not all economic measures go south during a recession. For example, recessions are usually associated with negative GDP growth, but GDP changes were positive on average during some recessions, such as the ones starting in 1960 and 2001. High unemployment is also considered characteristic of a recession, and yet four of the recessions since 1950 had unemployment below 6%.1 Investors’ views on where the economy is headed may hinge on how much weight they give to different indicators.
There’s also dispersion in opinions about these indicators.2 The median projection for GDP growth by the end of 2024 is 2.6%, which is actually up slightly from the last survey at 2.5%. But the range of projections is substantial. Some analysts gave a nonzero probability to GDP growth coming in below –5%. On the other end of the spectrum, GDP growth over 9% was viewed as plausible. Most analysts revised upward their expectation for unemployment—median projection went from 3.9% to 4.1% between surveys—but with a similarly wide range.
Finally, even if you fall in the camp that is pessimistic about the economy, the history of markets shows that stock returns have often been positive during recessions—the cumulative return on the US market was positive in 12 out of 16 two-year periods that began at the onset of a recession.3
Exhibit 1
Conflicting Messages Google search screenshot from August 26, 2024
Cumulative return shows the growth of a hypothetical investment of $10,000 in the securities in the Fama/French Total US Market Research Index over the 24 months starting the month after the relevant recession start date. The sample includes 16 recessions as identified by NBER from October 1926 to February 2020. NBER defines recessions as starting at the peak of a business cycle.
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