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Article Summary

United States stock market indexes have recently hit record levels alongside continued real GDP growth in the fourth quarter of 2023. Although this has been a point of optimism regarding the economy, other data points provide evidence that the United States is still headed for a recession. Many factors support the hypothesis that the fourth quarter of 2023 will give way to decreasing real GDP and a recession in 2024.

• Record consumer credit card balances and high levels of credit payment delinquency indicate consumers have overspent in recent quarters, boosting real GDP.
  • An unusually warm holiday season may have also led to increased consumer spending in the fourth quarter of 2023.
• Companies have been increasingly laying off employees, especially in the technology sector.
  • This is particularly notable, as the majority of recent gains in the stock market have been from technology companies.
• Inconsistencies have been noted in various sets of recent employment data. After revision, many of the referenced datasets decreased employment rate from their original values.
• Inflation has largely decreased from its recent highs, especially in both durable and nondurable goods.
  • Inflation regarding services will also likely decline in 2024, led by continued decreases in housing rents.
• The Federal Reserve will likely exercise caution and delay interest rate cuts until the second quarter of 2024.
• China's financial data indicates their economy is already in a recession.
  • Increased exports of manufactured goods from China will decrease global prices and lead to global market contractions.
• Several major United States regional manufacturing indexes have already noted decreasing activity.

Barone posits that given the amount of underlying data, continued real GDP growth into 2024 is unlikely. Instead, the United States economy will move into a recession.

Connection To Class

When reading about economic growth and variations within an economy, the business cycle is noted to have two parts. One part is an expansion, and the other is a recession. An expansion occurs when real GDP increases during a period, while a recession occurs when real GDP decreases for two or more continuous quarters. Barone references several points that more strongly adhere to the recession portion of the business cycle.

Although recent employment data is still strong, the author notes the data is inconsistent and has been revised lower on several datasets. Additionally, recent layoffs have been completed at many corporations. Increased layoffs lead to higher rates of unemployment. According to Okun's Law, unemployment and GDP are inversely related. In other words, an increasing level of unemployment would, in turn, decrease real GDP, as production would decrease with fewer workers actively participating in the economy.

Also noted is the impact caused by inflation. Inflation has been decreasing overall since its recent high in 2022. To help prevent inflation from becoming negative, the Federal Reserve will soon complete cuts to its benchmark interest rate. The question, however, is when. If the interest rate cuts are enacted too soon, inflation may rise again. If the cuts are enacted too late, it could add to the risk of deflation, where prices of goods decrease and currency value increases. Deflation leads to decreased production in the economy and a decrease in real GDP, which over two consecutive quarters becomes a recession.

Barone also references several variables in his reasoning of an impending recession. One type of variable, called a leading indicator, provides insight on the economy's future. One referenced leading indicator is the average weekly initial claims for unemployment insurance. While the number decreased in December 2023, it increased again in January 2024. This directly correlates with the rising numbers of layoffs in major United States corporations. As to this indicator's value grows, employment rates and production decrease. A decrease in production decreases real GDP, contributing to a potential recession.

Discussion Questions

1. What other leading indicators suggest the United States economy is heading toward a recession?
2. What leading indicators suggest the United States economy is, instead, heading toward an expansion?
3. The author references an idea of the economy achieving a "soft landing" given the recent corporate growth. Do you think that we have achieved a "soft landing?"