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ISMS 3: Will the US Have a Recession or a Soft Landing?

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Never has the US gov’t caused such a massive move in GDP. The question is, “which way is GDP going?” Will we see a recession or a soft landing?

Click here to get the PDF with all charts and graphs

Reasons for a recession

  • Extreme increases in interest rates are meant to slow down the economy
    • The fastest rate-hike cycle by the Fed since the 1980s
    • In the 2004 cycle, the target rate was hiked by 4.25% in total
    • Same as in the current cycle, but it has now been done much faster
  • The massive rise in mortgage rates is dramatically slowing the property market
    • This, in turn, leads to crashing prices, which will make people feel less wealthy and hold them back from spending
  • The yield curve has inverted, which has perfectly predicted prior recessions
    • All recessions in the US since 1968 were preceded by an inverted yield curve
    • The average time from inversion until the recession started was about 1 year (about mid-2023)
  • The surge in spending supported by gov’t handouts is working itself out of the system
    • Since 2Q21, households have demonstrated stronger than usual spending behavior
    • Strong wage growth has contributed to more savings in 4Q21 onward

Reasons for a soft landing

  • High employment means the economy is robust and can withstand the rate hikes
  • Companies are highly profitable, which will allow them to bear a slowdown more easily
  • Companies are sitting on tons of cash
  • Individuals slowed their spending in anticipation of an economic slowdown
  • Democrat party leadership will pump things up (e.g., strategic petroleum reserve)
  • US banks are in a strong position, holding lots of cash and gov’t bonds
    • Reducing the risk of a financial sector crisis that would exacerbate an economic crisis
    • At the end of 2021, the banks had nearly 40% of their assets in cash and securities
    • Compared to 13% at the end of 2007
  • Gov’t spending is going to be crowded out by borrowing interest payments
    • And then politicians will pressure the Fed to cut rates

Click here to get the PDF with all charts and graphs