Recession? via The Finance Professor

The following is from The Finance Professor:

Bloomberg is reporting that Goldman Sachs lowered its S&P500 year end target from 5100 to 4700. In general, Goldman is the best forecaster on the street and should be over-weighted versus other pundits. Goldman also is estimating a 35% risk of a recession, with a downside target of 3600 on the S&P in the recession scenario. If that were to happen, the buying opportunity window will be tight, as Powell is likely to respond to any sharp dips with more liquidity.

Recessions generally happen when either:

(a) yield curve is inverted,

(b) there are spikes in critical commodity prices,

(c) monetary tightening

Currently, we are very close to all three conditions being satisfied, with 2 year yields getting close to 10 year:

Bloomberg is also reporting that global equities have lost $10 trillion in value, which is a big hit to any wealth effect, but it only gets us back to where we were last year:

Typically recessions happen when jobs are scarce or layoffs are starting to happen, think 1980, 1990 and 2008. We are experiencing a slowdown, not a recession. Recessions don't tend to happen when companies are begging for employees. Jobs, especially good jobs, have always been difficult to find, but the current environment is very favorable for both white and blue collar & workers of most demographics.

Economists don't have it high on their list, but the labor force participation rate is one of the most important recessionary indicators. Since 1980, recessions have usually been prefaced by either a flat or declining labor force participation rate.

Unemployment has been falling mostly because a lot of people are dropping out of the workforce (i.e. stopped looking for a job). The current labor force participation rate is back to where it was in the late 1970s. About 1/2 of the covid job loss has been recovered, and due to corporate demand & high wages, the labor force participation rate is still rising. Does this feel like a recession to you?

The Finance Professor.