Eric Basmajian: Why The U.S. Economy Hasn’t Entered Recession Yet (And Why He Is Confident It Will Soon)

Episode Summary

Executive Summary: Eric Basmajan argued that the U.S. economy remains in a delayed but ongoing recessionary sequence despite soft-landing narratives. He sees continued weakness in leading indicators, cyclical employment, housing, and GDI, with recession likely to be evident by early 2024 and highly likely by 2025. Equity strength is viewed as narrow and not confirmation of broad economic re-acceleration.

Main Topics: Recession vs. soft landing debate (Priority: 5/5): Basmajan rejects the idea that the economy has clearly avoided recession, saying the business cycle is still unfolding through a classic contraction sequence, albeit slower than expected. Cyclical spending and consumer resilience (Priority: 5/5): He distinguishes durable-goods/cyclical spending from services spending, arguing the economy’s resilience comes mainly from sectors that normally contract first, but have only softened gradually. Housing, construction, and the credit transmission mechanism (Priority: 5/5): He explains that housing slows through permits, starts, and units under construction, then employment losses in residential construction feed into broader credit stress later. Labor market deterioration and unemployment (Priority: 5/5): Basmajan highlights losses in trucking, temporary help, residential building, and manufacturing as early labor-cycle weakness that should continue to push the unemployment rate higher. Why leading indicators still matter (Priority: 4/5): He defends leading indicators as mechanical and sequence-based rather than purely correlational, saying both the level and direction of the data now indicate contraction. Banks, deposits, and credit tightening (Priority: 4/5): He argues bank balance-sheet contraction is happening first on the liability side, with deposits shrinking and CDs replacing core funding, before loan contraction becomes visible. Markets as imperfect recession signals (Priority: 4/5): He says the stock rally is too narrow and bond yields are too Fed-driven to confirm a renewed upcycle, despite apparent market optimism.

Key Arguments: The economy is still in a pre-recession or already-in-recession phase because the cyclical sectors that usually break first have been weakening for months. Consumer spending is holding up mainly in services and necessities, while durable goods and other cyclical categories are only beginning to contract. Housing weakness is better measured by permits, starts, and units under construction; single-family is down from peak, while multifamily has delayed the broader downturn. Labor losses in cyclical industries are accumulating slowly, and the unemployment rate should trend higher into 2024. GDI is more concerning than GDP because real GDI has been negative year over year, historically a recession-aligned signal. The broad stock market is not validating a strong economy because gains are concentrated in a small number of mega-cap tech names, while small caps and cyclical assets remain weak. Bank lending is a lagging indicator; deposit outflows and securities runoff are more important early signs of tightening than headline loan growth. A true recession is about the level of economic activity turning negative, not just slower growth rates from extreme post-COVID levels.

Data Points: Bloomberg recession probability (Oct.): 99% - Reference point for how widely recession fears were shared last year Inflation decline: from about 9% in June to about 3% now - Used to explain why soft-landing hopes became widespread Durable goods consumption decline: about 1% to 2% contraction in real terms - Basmajan says this has been milder than typical pre-recession declines Typical durable goods pre-recession decline: 4% to 7% - Historical comparison for normal recessionary pullback Single-family construction: about 18% below peak - Reflects the earlier contraction in permits and units under construction Multifamily construction: continued to soar / no sequential contraction yet - Key reason the resi-construction-led recession has been delayed Cyclical employment basket size: about 20 million total payrolls - Used to contextualize the labor-market series being tracked Cyclical job-loss pace: about -30,000 - Latest reported pace, up from about -5,000 six months earlier Leading index growth: negative since April of last year - Conference Board leading index cited as persistent recession warning Real GDI: negative year over year for three consecutive quarters - Used as a strong recessionary indicator Current unemployment rate: 3.8% in August report - Cited as evidence of labor-market deterioration Unemployment rate jump: 0.3 percentage point increase - Described as somewhat anomalous and a sign the process is underway Employment composite growth: 0.6% - Basmajan’s coincident employment basket is still positive but slowing Bank lending: flat since January; still up YoY - Discussed as lagging and less important than deposits/securities Federal Reserve tightening: 525 basis points - Cited as the scale of rate increases since the cycle began

Pivotal Quotes: "the economy is in one of these pre-recessionary phases" — Eric Basmajan: His core view on where the business cycle stands now "Recessions are level concepts, not rate of change concepts." — Eric Basmajan: Explaining why slower growth alone is not the same as recession "it’s the marginal unit of activity that creates the recession" — Eric Basmajan: His explanation for why higher rates eventually cause downturns

Implications: Listeners should expect continued labor-market softening, possible recession dating in 2024, and potentially easier Fed policy later. Narrow megacap-led markets may overstate economic health, while cyclical sectors remain the key warning signal.