Published January 25th 2023

Daily Brief - What if there is no recession?

TLDR: By now, forecasting a serious economic slowdown in 2023 has lost all shock value. Everyone’s expecting it. Bring up a challenging year ahead at your aunt’s weekly backgammon game and it’s “Oh, yeah, you’re talking about THE recession, right?” It’s like when you go to sleep after a raucous night and you just know a hangover is inevitable no matter how much water you chug the night before. But what if it is avoidable (the recession, not the hangover)?

recession meme

To be the Michael Jordan of policymaking, a rate-hiking Fed Chairman and his team will aspire to a soft landing. This phenomenon is so rare it requires merely a single feat to qualify as the GOAT of central banking. And Jerome Powell’s odds seem to be improving.

The key to this outcome? The labor market.

Going all the way back to 1949, according to Fed’s data, there have been only 3 soft landings when Fed was hiking rates, and they all share one characteristic: the unemployment rate didn’t rise much, if at all.

In the three instances - 1964, 1984, and 1993-95 - the unemployment rate actually dropped each time. In contrast, bad recessions resulted whenever unemployment rose by more than half a percentage point from the low.

The Fed has a forward looking indicator based on this principle: the Sahm Rule recession indicator. As you can see below, it’s been quite accurate and - at the moment - is showing no chance of a recession in 2023.

recession indicator

In fact, Powell’s chances to enter the Central Banking Hall of Fame are looking brighter by the day as the unemployment rate putters around the lows.

Idea Spotlight: Netflix

Macroeconomic conditions (activity and inflation gauges) have deteriorated substantially.

However, Netflix often outperformed in this environment as expectations for policy easing and macro outlook brighten.

Click to read the full insight!

nflx price history

Daily Brief - What if there is no recession?

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