Any economists who think the U.S. is headed for a recession could be wrong: What could happen instead, according to one school of thought, is multiple recessions reverberating over the coming year. The idea, dubbed the “rolling recession,” is that the economy might not shrink all at once, but could see different sectors declining one after the other. While overall GDP may not show negative quarters, parts of the economy such as real estate, manufacturing and corporate earnings will behave and feel like they are in a recession. It’s very different from what the US has seen before, but these are unusual times. “We may not see an outright recession where everything is declining at the same time like in the past,” said Sung Won Sohn, professor of finance and economics at Loyola Marymount University and chief economist at SS Economics. “It’s going to take some kind of domestic or foreign disaster to have a recession at the same time. I think we’re going to see a rolling recession going forward.” Uncertainty about how the economy will look comes as market participants await the next official reading on growth. The Commerce Department is expected to release its flash estimate for fourth-quarter GDP growth on Thursday, with economists polled by Dow Jones expecting annualized growth of 2.8%. This concludes a volatile year in which the first two quarters began with negative GDP readings, in line with a long held definition of a recession. However, a robust labor market and surprising consumer resilience in the face of persistently high inflation have kept the economy afloat. This is the year economists expect that to change. How It Will Happen “It started with housing and inventory and manufacturing, as industrial production shows,” Sohn said. “Now consumer spending and eventually corporate spending will begin to contract.” Indeed, after 29 consecutive months of expansion, ISM manufacturing readings have shown two direct contraction readings below 50. The value of ISM services also entered contraction territory in December after showing 30 straight months of growth. Similarly, housing numbers have been grim. According to census data, building permits are down 30% year over year, while housing starts are down nearly 22%. But even among economists who expect a standard recession, the prospect is that it will be comparatively benign compared to some of the downturns of recent decades. “A global slowdown is underway and we won’t be getting out of the woods anytime soon. But we’re glad we never penned a serious global crash,” Seth Carpenter, Morgan Stanley’s chief economist, said in a recent note to clients. “The slowdown from last year to this year is very, very real, but it doesn’t look like a catastrophe.” Federal Reserve officials have been hoping for this best-case scenario as they hike interest rates to tame inflation. Most of them have said they expect the economy to avoid a recession, although Fed Governor Christopher Waller said last week that a mild recession would be acceptable as long as inflation also came down. The National Bureau of Economic Research is widely regarded as the arbiter of recessions and expansions, and will have its hands full uncovering current economic trends when deciding how to categorize this period. “We continue to believe that the appropriate debate is not so much recession vs. soft landing as that the rolling recession can continue without eliciting a formal recession declaration,” wrote Liz Ann Sonders, the chief investment strategist at Charles Schwab, in a recent analysis . Sonders is a proponent of the “rolling recession” theory, noting that stocks can do well even in downturns. “We view the best-case scenario as continued weakness in the economy offsetting strengths,” she added. “We’re more likely to get the call from the NBER — which is historically well past the beginnings of the recession.” A traditional recession looms Of course, there are critics of the ‘rolling recession’ theory. Joseph LaVorgna, US chief economist at SMBC Nikko Securities America, expects a more traditional recession, especially considering the dangerous state of the housing market and the slowdown in manufacturing. “Have we ever seen a period when both housing and manufacturing were in recession at the same time, and we didn’t have a recession?” he said. “The only way to avoid a recession at this point is for inflation to collapse suddenly and unexpectedly.” A collapse in inflation is unlikely. In fact, there are some economists who believe that the current slowdown in inflation will hit a wall once inflation falls to around 4%. LaVorgna, the director of the National Economic Council under former President Donald Trump, also expects some turmoil in the job market as data shows the economy has lost about 714,000 construction jobs due to the collapse in housing construction. Still, LaVorgna doesn’t expect a major recession, saying there’s even an outside chance inflation could fall quickly and the economy could sidestep a contraction. “The stock market is betting on it, so you can’t say it can’t happen,” he said. “When I think of probabilities, I just think it’s unlikely.”
Comments are closed.