Best. Recession. Ever.

First things first - recessions are totally normal and based on the fact we get one approximately once every ten years or so, we can come up with a simple rule of thumb that in any given year we have about a 10% (or 1 in 10 years) chance of experiencing a recession. The further we get from the last recession, in theory, the odds tick a bit higher but it's certainly not by 10% per year as these things don't occur on a schedule and straight lines do not exist in nature or economics.

Now maybe I should have started with this point but what is a recession anyways? Let's just stick with a simplified explanation and go with something like the economy shrinks for at least half a year - it can shrink a little or a lot, it can be brief or extended. A really deep and prolonged recession could then be called a depression. Don't come at me pedants, this is more than sufficient for the purposes of this discussion!

For the rest of this post I am going to rely on US recessions and economic data for the simple reason that we, as Canadians, sleep next door to an elephant and our economy is so tightly integrated with our Southern neighbours that it is rare for Canada to experience a recession while the US economy is expanding and it would be even more rare for Canada to not experience a recession while the US economy is contracting. As the old saying goes, when America sneezes Canada catches a cold!

So where are we today?

Well since the last recession waaaay back in 2020, there has been a seemingly endless chorus of prognosticators telling us the economy was once again on the verge of imminent collapse or that we were already in a recession - the data simply had caught up to capture it or worse the data was just plain wrong and their own fancy regression models and data sources were better. We are witnessing perhaps the most anticipated recession of all time!

I've taken to calling this period a rollcession as it's certainly not a recession and admittedly I have been camping out with the "soft landing" people (slowing the economy just enough to avoid a contraction) or possibly a very mild recession (not deep and relatively brief). But why?!? Well not to sound smug here but I would rather be right than sound smart and the fact of the matter is that around 85% of the time during my 43 years on this planet, our economy has not been in a recession - I'll take those odds!

There is no doubt that parts of the economy were running hot through 2021 as the planet tried to re-open from the COVID shutdowns - supply chains were in shambles while consumers were flush with cash and looking for ways to spend it. Inflation was quickly becoming a very real problem for Central Bankers, leading Jerome Powell (Chairman of the US Federal Reserve) to warn of 'some pain' which was code for a willingness to derail the economy to get inflation in check, as is their primary function. Most Central Bankers were singing from the same song book and global policy was largely coordinated, unofficially of course.

What we also need to understand about recessions is that no two recessions are the same though we as humans seem fundamentally wired to try and design systems to avoid the last crisis (or the one before that one). That of course doesn't stop people from pointing to past cases where a certain thing happened which led to a recession or even trying to compare the current situation to a prior point in time. COVID-19 and the resulting global shutdowns were truly unique, just as the economic conditions we had going into and coming out of this period were not like any other time in history - demographics are ever-evolving, credit is far more abundant, services contribute relatively more to the economy while goods manufacturing contributes relatively less than any time before, we have become a society of spenders more than savers and most apparent is the role that technology plays in work and personal lives is unlike anything we had during prior economic cycles. That is a long-winded way of saying I don't believe we're in or headed for a recession like the last one, or the one before that, or the one before that, or the one before that ... and well, you get the idea.

Recessions tend to be triggered by policy errors aimed at dealing with excesses in the economy, which makes the current situation curious. The excess being targeted was inflation and the only viable policy tools available to Central Bankers were to aggressively raise rates while reducing the amount of money in the system (this is a very crude description of Quantitative Tightening). No finesse, no nuance. Everyone knew what the issue was - it wasn't even hiding in plain sight it was right there for all to see and for everyone to talk about. Central Bankers set out with an intentional plan - higher rates would slow the economy, make all borrowing more expensive, stocks markets would 'correct', the housing market would cool (if not collapse), jobs would be lost (some pain!), and the excess cash people had accumulated would be spent on essentials as more people were out of work. At the end of the day, inflation would come back to their 2% target level. Easy peasy!

[As an aside: I have two beliefs that are somewhat relevant here. The first is that the thing that everyone is talking about potentially becoming a problem is unlikely to become a problem, if for no other reason than everyone is talking about and taking appropriate actions on their own. The second is that markets have a funny way of making the largest number of people wrong.]

What has transpired since has been just shy of an economic miracle as in a seemingly coordinated fashion, the hotter pockets of economic activity have been rolling over one by one, each seemingly experiencing their own micro-recession (hence the rollcession), which so far has avoided a widespread contagion and full-blown economic collapse. CEOs and other decision makers are taking appropriate actions within their companies to deal with the potential problems (and higher rates) that everyone has been talking about.

Let's look at a few of the greatest hits that people like to play during the endless recession calls ...

Inflation. I don't want to be the inflation guy but it's been a hot topic for almost two years now and a topic I have written about in the past (see: here, here, here and here). I have been quite vocal about two things for the past 12 months - firstly that the price of lettuce is ridiculous and secondly that inflation peaked in June 2022 and would decline from there. As I mentioned above, these things don't move in straight lines so there would undoubtedly be bumps in the road down the other side of the mountain but the trend has been generally declining inflation for the past year - we call this disinflation, as price levels are still increasing but at a slower rate. There is also plenty of evidence of pockets of deflation where prices have either returned to their pre-COVID levels or at least are back to the previous trends, effectively wiping out the extra inflation we experienced, but that shouldn't be the expectation for all goods and services so some prices are just going to be permanently higher ... sorry.

Once we get back to the 2% target rates for annual inflation, Central Banks will have achieved their goals. Provided it looks like we are on track to get there, the need for continued rate increases will have been eliminated - it's these rate increases that most pundits will say are the policy error that is likely to trigger a recession as people find it hard to adjust.

Jobs. While job cuts in the tech sector were garnering a lot of headlines earlier this year, the simple truth is that this sector had over-hired and were now cleaning up some of that excess before it became a very real problem for them. The layoffs represented very low percentages of their workforces and a miniscule percentage of the overall workforce. Job openings continue to rule the day, particularly in the service industries, and while we are seeing more and more people re-join the workforce (unemployment rate is the percentage of people actively willing, able, and looking for work), the unemployment rate on a national level continues on a downward trend. Jobs are plentiful. Employers are hiring. Workers want to work. The fear of course was that higher rates would for employers to cut more jobs as they needed to shore up their financials but the truth is that simply hasn't happened ... yet.

Housing. Perhaps the most impressive part of the economy has been the resiliency of the housing market, in the face of much higher interest rates. Housing was expected by many to be ground zero for the interest rate impact, which would tank the housing market and bring the rest of the economy along for the ride (please refer to the recession before the last recession). We can point to limited supply (people hesitant to move because they have low mortgage rates locked in) and availability / affordability issues but by and large local real estate markets have weathered the rate hiking cycle remarkably well.

Canada deserves some additional commentary here - as our fixed mortgage terms tend to be shorter (3-5 years) and we have a LOT of people with variable rate mortgages, there remains a looming potential issue on the horizon as these mortgages come up for renewal over the next few years.

Cash. Despite high inflation, households haven’t yet depleted their pandemic-related savings. The title of that piece from the St. Louis Fed a few weeks back perfectly sums up the current situation. If you click through you will see a few things:

• People saved a lot of money during the pandemic
• People have spent a lot of their savings since the re-opening
• People still have around $1 TRILLION in excess savings

Were the savings skewed toward higher earners? Almost certainly. Is the drawdown of those savings skewed toward lower earners? Almost certainly. Do inflation and higher rates hurt lower earners first? Unfortunately yes.

The big point to focus on here is that there is still a large buffer against inflation, higher rates (coincidentally those excess savings are now actually earning some interest), and any broad economic slowdown.

Time is a flat circle. Wait long enough and recession calls will eventually be right but in the meantime let's make the best of the time we have left with this current economic expansion.

So far so good on the policy decisions made by the Central Bankers in their efforts to orchestrate a soft landing.