Has the Stock Market Slide Signaled Recession?
Stock prices have suffered of late. From its previous peak to its recent lows, the S&P 500 Index has fallen 11.2 percent. Over that same time the Dow Jones Index has lost 9.1 percent, while NASDAQ prices have dropped 13.7 percent. Though less extreme than the average or pre-recession market corrections, these declines nonetheless point toward recession. The picture deserves consideration, despite the old Wall Street joke, that stocks have forecast eight of the last five recessions.
Economic Indicators: Mixed Signals
Market action aside, recession is not an unreasonable expectation. Economic indicators are mixed, to be sure, but there is no denying that employment, industrial activity, and confidence measures show less strength than previously. The employment figures are especially noteworthy. The figures until recently had shown remarkably robust hiring. While for several reasons, this picture was always suspect, employment growth has now slowed enough to suggest that the economy might well be rolling over.
Housing, too, though showing some strength in the last month or so, shows a fundamental erosion in the pace of both sales and construction activity. New orders for capital goods remain positive, but nothing in this area could be described as robust. Meanwhile, consumer spending, what has carried the economy for quite some time now, has exhibited considerable restraint of late.
Historical Context: Recession Patterns
Perhaps even more compelling is the picture one can draw from the historical averages. Over the past 75 years, the United States has experienced 11 recessions, as determined by the prestigious National Bureau of Economic Research (NBER). That is an average of one every seven years or so. Each downturn corrects imbalances built up during the prior expansion. Severity varies greatly from one recession to the other, with the so-called Great Recession of 2008-2009 the worst of the lot. It lasted some 18 months and showed the biggest drop in real gross domestic product (GDP). These corrections, including the Great Recession, last some an average of 10 months. They hardly occur regularly. The shortest stretch of growth between recessions is 12 months in the early 1980s. The ebullient 1960s enjoyed one of the longest periods of robust and uninterrupted expansion. It lasted eight years and ten months. During that long stretch of expansion, economists decided that their āscienceā had cured the economy of business cycles. They made that declaration just before the onset of the recession of 1970. So much for hubris.
The Post-Pandemic Economy: A Unique Cycle
The last NBER-designated recession was the short, sharp pandemic-induced economic decline between February and April 2020. With that as a base, the economy has so far enjoyed five years and two months of expansion. The averages then would suggest that a downturn is not due for another couple of years. But this easy calculation requires perspective. Both the pandemic-related recession and the subsequent expansion can hardly be described as typical. The two-month economic decline in 2020 was entirely the result of lockdowns and quarantines policies. It was not, as is typically the case with recessions, an adjustment for built-up excesses. Nor can this past period of expansion be described as a normal cyclical expansion. On the contrary, it has combined bursts of recovery fueled by highly stimulative policies in Washington with strange periods of halting growth, such as the first half of 2022 when the real economy suffered a net decline, albeit only a modest one.
Political and Policy Considerations
While there is room here for dispute among even the most herd-like forecasters, there are three other considerations that speak of recession. One is the introduction of President Trumpās tariffs and the prospect of a trade war. Tariffs tend to add to inflation and restrain trade, both of which depress economic activity. Another consideration is the economic restraint imposed by the recent budgetās spending cuts as well as in the DOGEās efforts. A third consideration is how the inflationary effects of those tariffs on top of already above target rates of inflation has kept the Fed from easing in ways that might help the economy avoid a contraction. None of this, to be sure, guarantees a recession, but it points more in that direction than toward expansion.
Stock Market Trends and Recession Dynamics
If the stock marketās recent retreat has accurately identified a coming recession, then past averages suggest a 30-some percent drop in stock prices peak to trough. After what has already occurred, that would involve a further decline of just over 20 percent in for instance the S&P 500 Index. The market typically reaches its lows even before the actual economic recession begins. From there, stock prices typically begin to rise in anticipation of the inevitable economic recovery on its horizon. Thus, stock prices begin their recovery just as the economy – employment, consumer spending, etc., what media often refers to as āMain Streetā -suffers its worst setbacks. It is at this juncture that The New York Times always produces an indignant editorial decrying the injustice of Wall Street enjoying āgainsā while Main Street āsuffers,ā or words to that effect. That editorial also appears in the historical averages.
