ACG Insights: Ground Control to Major Powell

(Download the full report HERE)

Executive Summary

  • What kind of landing can the US Federal Reserve conjure in the face of the most anticipated recession in US history (Exhibit 1)?
  • Contrary to the headlines, the overall employment environment remains robust, and consumers continue to spend (Exhibit 3 & 4)
  • Might the economy prove too resilient, forcing the Fed to be more aggressive in curbing the economy to combat inflation? Further rate hikes or not enough pose potential risks to markets

Background: Commencing Countdown, Engines On 

After a difficult year in financial markets, there was plenty of pessimism to usher in the new year. Indicative of this negative outlook, the probability of an impending recession hit a new high according to the Fed’s Survey of Professional Forecasters (see Exhibit 1 in the report HERE). But what does a recession mean for the economy and financial markets?

In order to delineate between economic recessions and expansions, The National Bureau of Economic Research (NBER) keeps a chronology of US business cycles. So, while two consecutive quarters of negative gross domestic product (GDP) growth is a useful heuristic, it is not the official definition of a recession. NBER’s Business Cycle Dating Committee emphasizes a recession to include “a significant decline in economic activity that is spread across the economy and lasts more than a few months.2” While there is no fixed rule about which measures contribute to the process, the committee relies on a range of monthly economic activity measures including nonfarm payroll employment, personal income less transfers, employment as measured by household survey, wholesale-retail sales, real personal consumption expenditures, and industrial production. Final judgement is completed retroactively to avoid the need for major revisions.

Given the complexity in understanding the current macro-economic environment, investors and media members have taken to using the phrases “hard landing” or “soft landing,” alluding to the severity of an aircraft’s touchdown, to describe the economic path ahead. To clarify, a “hard landing” would be characterized by inflation coming down only after a significant economic slowdown, i.e. recession, likely coinciding with a substantial increase in unemployment. Conversely, a “soft landing” sees inflation tamed with a lesser decline in economic activity and minimal job losses. What does the latest data suggest? Download the full report HERE where we discuss

  • The Employment Picture: Headlines vs. Reality
  • Better Than Anticipated Consumer Spending
  • No Landing and a Hawkish Fed
  • Market Implications
  • Conclusion: Floating in a Most Peculiar Way