(Yet) more recession fears

“Barnes been shot seven times and he ain't dead. Does that mean anything to you, huh? Barnes ain't meant to die. The only thing that can kill Barnes is Barnes.” (Rhah, Platoon)

Many still suspect that the US economy is on the cusp of a downturn. Or at least this is what they say in public. As usual, the chaos of incoming data and news flow continues to provide just enough cover for such fears. The difficulty for those trying to keep their nerve and stay invested, or indeed get invested, is knowing what to believe.

There are asymmetric incentives for commentators – free marketing oxygen can only really be exchanged for strident (mostly negative) views. The overwhelming majority of the time, such stridency is inappropriate at best.

The global economy usually trundles on. The capital markets circulatory system¹ is mostly helpful in this, crowdsourcing financial fuel efficiently and cost effectively. None of that is going to draw the masses of course, which as we know are looking for something to stoke outrage, disgust, or terror. The more mundane and frustratingly stable truth of the global economy is the enemy of the 24-hour news cycle and our moth-to-light tendency towards doomerism.

As Stephen Pinker pointed out, you will never “see a journalist reporting on a war not breaking out or a city that has not been bombed. As long as bad things don’t vanish altogether, there will be enough incidents to fill a 24-hour news channel²”. News is about things that happen, not things that don’t.

BUT

Yes, there are moments when these stopped-clock doomers appear to get it right. The world economy occasionally does falter, with its component parts stumbling more often. The causes of these stumbles are many and various. Investors and economists tend to try and develop rules and norms by scouring the past for any regularities.

Unfortunately, there are many fewer than we permit ourselves to admit. As we’ve pointed out many times, there are simply not enough instances of anything in a comparable economic context for us to be confident. The data is also much less representative of the reality on the ground than an industry increasingly in thrall to quants’ requirements.

That applies to interest rate cutting cycles as well as recessions, pandemics, US elections or pretty much anything else that dominates the newswires. That severely limits the amount we can say without sounding mealy-mouthed.

Cracks in the US labour market?

Right now, there are aspects of the US employment backdrop we need to monitor closely. A rise in the number of survey respondents not able to find all the work they want has historically proved worthy of paying attention to.
There are problems³ though.

There have been sharp declines in the number of people responding to these surveys in the last few decades, raising the possibility that they are no longer as representative. Seasonal adjustments are large and have perhaps become even more difficult in the shadow of the pandemic’s giant reorganisation of work, with the same true of the recent immigration surge.

The positive case

Despite the uncertainty, there is plenty for investors to be optimistic about at the moment and still sufficient cause to sideline the many discussed threats. On the positive side, the stars increasingly seem to be aligning for a surge in productivity.

The notable pick-up in both software, and research and development spending this last several years, is perhaps starting to pay off. Tight labour markets can help. Scarce and more expensive workers push companies to find ways to adopt and adapt the incoming technological frontier.

Many will point to the US campaign trial/trail or any number of tragic, depressing, and needless conflicts as reason enough to worry. Of course, the world can always take a darker turn yet. Those conflicts could still worsen and widen materially.

However, the necessarily cold-hearted calculation facing investors is whether any of that is sufficient to knock nascent trends in productivity growth off their perch. Far worse periods for international relations and humanity in general, such as the 1950s and 60s⁴, notably failed to do so.

To that extent the question is not so much whether to invest, but how. The answer clearly depends a great deal on personal circumstances, risk appetite and so on. However, at the most basic level, this stressful but ultimately hopeful investment context should put a premium on global diversification. The fact that we are not in a hamster wheel of perfectly repeating decades is important too.

As we’ve noted before, that makes interpreting past performance hazardous, particularly amidst gathering signs that we are now in a very different macroeconomic landscape to the one that has dominated the post-great financial crisis landscape.