The Recession That Never Came

It will happen eventually though--just like moon colonies

Forecasters and prognosticators had delighted in predicting when the next recession would be coming, mostly expecting one soon. As inflation gauges indicate its tailing off this year while growth indicators are still ‘above trend,’ the market is starting to accept that the recent expansion will not be immediately followed by a quick contraction.

It took quite a while to get here. Boom and bust expectations are to an extent built into capitalism as it is widely understood. But the current economy has shifted from the industrial-dominated 20th century style system, where supplies of raw materials, transportation and distribution, manufacturing capital, and labor all along the supply chain can see a shortage anywhere in the system, to a technology-driven information economy where the old industrial economy has largely become one of the tech industry’s suppliers as nearly everything transitions to digital.

None of this implies that downturns are not going to happen. But I have a few thoughts about why this current growth cycle has been fairly enduring despite challenges like the 2022 invasion by Russia of Ukraine and other geopolitical instability along with last year’s regional banking crisis and the ongoing challenges faced by many retail chains.

The pent-up investment, demand, and consumption from the 2007-2011 depression has served as fuel for the last decade and a half of growth. Asset values being down as far as they were caused an artificially low level of production during that period, and the effects on the labor market and in many other areas are permanent and considerable, but here is one salutary effect.

Another cause of relatively uninterrupted growth is the free use by both major political parties of the government’s credit. Despite plenty of sanctimonious (but hollow) rhetoric on the debt and the deficit an unofficial consensus that wE CaN afFoRD It has allowed plentiful government spending to help underpin the economy. Spending from the Inflation Reduction Act continues to be distributed around America, and its incentives for green energy and electrical vehicles are likely to promote continued expansion.

Clearly the recent AI boom has stimulated economic growth. Most of the tech giants are spending huge amounts of cash to buy chips from Nvidia (NVDA), whose shares have had an extraordinary run-up to where the company’s market cap now exceeds $3 billion. But just like the calls for a recession, the expectations for an “AI Winter” to occur sooner rather than later have so far been unfulfilled.

Housing prices have not weakened as much as many had predicted. In some markets the prices have actually kept going up, while in others they might be flat or down modestly. But broad strength for housing in many markets means that not even the spike in interest rates has been enough to dramatically lower house prices, even if the pace of selling has slowed down.

Not a lot of help actually came from the Fed this cycle until recently—at one point this summer the markets seemed to be worried that the bank’s extreme obsession with lowering inflation had decimated the best job market in a long time (until the next month’s report was better). This led up to last month’s rate cut, the first in a long while and a reassuring sign to the markets that the rates are finally moving in the preferred (economy-stimulating) downward direction now.

While the broad market now tends to move in line with the major tech shares, the most counter-cyclical industry is now fossil fuels, which for example saw a large increase in 2022 while the overall market fell. But the green energy transition continues so demand for petroleum is likely to stagnate, which means that only geopolitical disruptions that threaten the supply are likely to push the price of oil higher. Avoiding fossil fuel shares with ETFs such as the SPDR S&P 500 Fossil Fuel Reserves Free ETF (SPYX) could help avoid this risk.

Imbalances left over from the lockdown era of the COVID-19 pandemic (lumber, labor, used cars, etc.) have started to even out again. While some sectors saw supply runs and demand spikes during that era, prices have reverted back down for many of those previously-rare goods.

This era in stocks has seen plenty of threats and temporary reversals and ‘corrections’ but the indices continue to churn along and move upward over time. Plenty of times during this run, lots of people have called for an impending swoon. But here we are, continuing upward, knowing the good times never last forever, but still long on the market.

[Disclosure: I trade stocks, ETFs, crypto, and options, which can include assets discussed here.]