Bonus Episode: In Person Recording, Increased Probability of Recession

Episode Summary

Executive Summary: The podcast debates recession odds across 6-, 12-, and 18-month horizons, with hosts agreeing risks are elevated but differing on timing. One speaker sees recession as likely within 12 months due to aggressive Fed tightening, tightening financial conditions, and a vulnerable global backdrop; the other argues the labor market, excess savings, and improving inflation trends can still produce a soft landing over the next year, though 18-month odds remain high.

Main Topics: Near-term recession odds and timing (Priority: 5/5): The hosts distinguish between a recession beginning in the next six months versus later horizons. One argues near-term risk is modest because labor markets remain strong and consumers still have firepower, while the other says the economy is unusually vulnerable and could be tipped into recession by even a modest shock. Fed tightening as the main recession channel (Priority: 5/5): A central argument is that the Federal Reserve’s aggressive hiking cycle will transmit to the real economy with a lag, tightening financial conditions, slowing demand, and potentially forcing a mild recession to restore price stability. Labor market as the key recession test (Priority: 5/5): Both speakers emphasize that a true recession requires meaningful labor-market deterioration: rising unemployment, sustained job losses, and weakening hiring. They use claims, openings, quits, and employment growth as the primary indicators. Consumer sentiment and savings as buffers (Priority: 4/5): The discussion centers on whether households will keep spending or retreat into a 'bunker' response. Excess savings, still-healthy travel/restaurant activity, and moderating inflation are cited as reasons a recession may be delayed or avoided. Yield curve and credit conditions (Priority: 4/5): They debate the predictive power of the Treasury yield curve and senior loan officer surveys. One speaker trusts the traditional recession signals; the other argues QE/QT may distort the yield curve and that credit tightening matters more than the curve itself. Housing and rate sensitivity (Priority: 3/5): Housing is treated as a potential early recession signal because it is highly interest-rate sensitive. Falling new-home sales and affordability pressures are cited as important leading indicators for broader slowdown. Global and supply-side shock risks (Priority: 4/5): Europe’s energy crisis, Russia-Ukraine, oil prices, and pandemic-related supply disruptions are identified as external shocks that could tip an already fragile U.S. economy into recession.

Key Arguments: A recession is not just two quarters of weak GDP; it requires broad-based, persistent weakness, especially in employment and unemployment. Near-term recession odds are lower than 12- or 18-month odds because the labor market is still strong and consumer spending has not collapsed. The Fed is expected to keep hiking into early next year; the lagged effect of tighter financial conditions is likely to be the dominant recession trigger. Even if inflation starts to ease, the Fed may continue tightening to protect credibility, accepting a mild recession if needed. The yield curve historically predicts recessions well, but QE/QT may distort its current signal; credit tightening may be a more reliable contemporaneous warning. A severe deterioration in consumer confidence, especially Conference Board confidence dropping sharply, has historically preceded recession by roughly five months. Housing weakness is an important leading indicator; large year-over-year drops in new-home sales often precede recession by about a year. Europe’s energy constraints and possible winter/next-year gas shortages could feed back to the U.S. through exports, sentiment, and financial markets. A soft landing remains possible if consumers/businesses self-regulate, labor demand cools gradually, and inflation decelerates without a renewed shock.

Data Points: Near-term recession probability: 10%–15% - One speaker’s estimate for recession beginning in the next six months Near-term recession probability: 20% - Alternative estimate for six-month recession odds, due to vulnerability to shocks Near-term recession probability: 30% - Estimate that recession risk peaks early next year as financial tightening bites 12-month recession probability: 75% - Speaker’s view that recession is highly likely within the next year 12-month recession probability: 50%–55% - More cautious estimate that a recession is possible but not yet likely within a year 18-month recession probability: 70% - Speaker’s estimate for recession over the longer horizon 18-month recession probability: 65%–70% - Alternative estimate for 18-month recession odds Average peak-to-trough GDP decline in post-WWII recessions: 2.5 percentage points - Historical average real GDP contraction across 12 recessions since World War II Great Recession GDP decline: 4% peak-to-trough - Quarterly real GDP decline during the financial crisis recession Pandemic recession GDP decline: 15% peak-to-trough - Monthly GDP contraction during the 2020 pandemic recession Pandemic jobs lost: 22 million - Employment loss cited for the pandemic shock Consumer confidence signal: 20-point drop over 3 months - Conference Board confidence decline historically associated with recession 3–6 months later Average lead time for confidence signal: 5 months - Mean lag between Conference Board confidence drop and recession onset Initial jobless claims: 213,000 - Recent reading described as very low and consistent with labor-market strength Jobless claims in recession risk zone: 300,000–350,000 - Typical range when the economy is heading into recession Jobless claims concern threshold: 275,000 - Level where one speaker starts to get nervous if sustained Fed funds rate target before hike: 2.25%–2.50% - Starting policy range referenced in the discussion Expected Fed hike at upcoming meeting: 75 bps - Expected move in the current meeting End-2022/early-2023 Fed funds path: 4.25%–4.75% - Projected policy rate after several hikes and a possible additional move in January 10-year Treasury yield: 3.5% - Current long-term rate used in the yield-curve discussion Yield curve inversion: ~40 bps inverted - 10-year minus 2-year Treasury spread described as deeply inverted Policy yield curve threshold: 10-year vs Fed funds rate - Alternative curve definition discussed as historically predictive Wage growth target for 2% inflation: ~3.5% - Wage growth level suggested as consistent with inflation at target Current wage growth: ~5% - Approximate prevailing wage growth referenced during the discussion Monthly core CPI inflation: 0.4%–0.5% - Recent monthly pace that needs to slow for a soft landing Desired monthly core inflation pace: 0.2%–0.3% - Needed near-term pace for inflation to normalize Desired monthly core inflation pace later: 0.1%–0.2% - Longer-term pace needed to be consistent with the Fed’s target Underlying job growth: 350,000/month - Current pace cited as too strong for inflation control Needed job growth pace: Under 100,000/month - Level needed to cool labor demand without severe recession Housing recession indicator: 30% year-over-year decline in new home sales - Historically associated with recession about 12 months later

Pivotal Quotes: "The probability of recession beginning in the next six months...I’d say between 10, 15 percent." — Chris: Near-term recession estimate based on strong labor market and excess savings "I’d put it at 20%...because we’re so vulnerable to that shock." — Ryan: Counterpoint emphasizing fragility and susceptibility to even small negative shocks "I think the recession is a bit later than that...for the 12-month, I would estimate something 50%, 55%." — Chris: Longer-horizon view that recession risk rises later if the economy continues to cool without breaking

Implications: Listeners should expect slower growth, elevated recession risk, and continued Fed pressure on the economy. The next few months hinge on inflation, hiring, and shocks from abroad; if labor-market cooling is orderly, a soft landing is possible, but any energy, supply-chain, or policy surprise could trigger recession.