Some economists see a ‘rolling recession’ ahead. What that means

All the economists who think the US is heading for recession could be wrong: What might happen instead, according to one school of thought, is multiple recessions reverberating over the year ahead. Termed “rolling recessions,” the idea is that rather than contract broadly and all at once, the economy could see different sectors decline in succession, one after the other. While headline GDP might not indicate negative quarters, portions of the economy, such as housing, manufacturing and corporate profits, will act and feel like they are in recession. It’s something quite unlike the US has seen before, but these are unusual times. “We may not see an outright recession, with everything declining simultaneously as we had in the past,” said Sung Won Sohn, professor of finance and economics at Loyola Marymount University and chief economist at SS Economics. “It will take some sort of catastrophe at home or abroad to have a simultaneous recession. I think we will see rolling recession in the future.” Uncertainty about what shape the economy will take comes with market participants awaiting the next official reading on growth. The Commerce Department on Thursday is scheduled to release its advance estimate for fourth-quarter GDP growth, with economists surveyed by Dow Jones expecting an annualized gain of 2.8%. That will bring to a close a volatile year in which the first two quarters started out with negative GDP readings, meeting a long-held definition of recession. However, a robust jobs market and surprising consumer resilience in the face of persistently high inflation have kept the economy afloat. This is the year economists expect that to change. How it will happen “It began with housing and inventories, and manufacturing as evidenced by industrial production,” Sohn said. “Now consumer spending and then eventually business spending will start cutting back.” Indeed, ISM manufacturing readings have indicated two straight sub-50 contraction readings after 29 months in a row of expansion. The ISM services reading also entered contraction territory in December after 30 consecutive months showing growth. Similarly, housing numbers have been dismal. Building permits are down 30% year over year, while starts have fallen nearly 22%, according to Census data. But even among economists expecting a standard recession, the outlook is that it will be comparatively benign stacked up against some of the downturns seen over the past several decades. “A global slowdown is underway, and we will not be out of the woods any time soon. But we are happy we never wrote down a serious global crash,” Morgan Stanley’s chief global economist, Seth Carpenter, said in a recent client note. “The slowdown from last year to this year is very, very real, but it is not looking like a disaster.” Federal Reserve officials have been hoping for that best-case scenario as they raise interest rates to tame inflation. Most of them have said they expect the economy to skirt a recession, though Fed Governor Christopher Waller said last week that a mild recession would be acceptable so long as it meant inflation falls as well. The National Bureau of Economic Research is generally considered the arbiter of recessions and expansions, and will have its hands full unpacking the current economic trends when it decides how to categorize this period. “We continue to think the appropriate debate is not so much recession vs. soft landing, but can the rolling recession continue without eliciting a formal recession declaration” from the NBER, wrote Liz Ann Sonders, chief investment strategist at Charles Schwab, in a recent analysis. Sonders is a proponent of the “rolling recession” theory and noted that stocks can perform well even in downturns. “We view the best case scenario as one of an ongoing roll of weakness through the economy, with offsetting pockets of strength,” she added. “More likely, we will get the call from the NBER — which is historically well after recessions’ beginnings.” A traditional recession looms. To be sure, there are detractors to the “rolling recession” theory. Joseph LaVorgna, chief US economist at SMBC Nikko Securities America, expects a more traditional recession, particularly when considering the perilous state of the housing market and the contraction in manufacturing. “Have we ever had a period where both housing and manufacturing were in recession at the same time and we didn’t have a recession?” he said. “The only way you’re going to avoid a recession at this point is if inflation suddenly and unexpectedly collapses.” A collapse in inflation is unlikely. In fact, there are some economists who think the current softening in price increases will hit a wall once the inflation rate drops to around 4%. LaVorgna, National Economic Council chief economist under former President Donald Trump, expects the labor market also to see some tumult ahead, with data to show the economy lost about 714,000 construction jobs due to the housing collapse. Still, LaVorgna doesn’t expect a major reduction and said there’s even an outside chance that inflation could fall rapidly and the economy can skirt a contraction. “The equity market is banking on that, so you can’t say it can’t happen,” he said. “Thinking in terms of probability, I just think it’s unlikely.” Correction: Joseph LaVorgna was chief economist at the National Economic Council under former President Donald Trump. An earlier version missed its title.

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