'People give up on recession just as it arrives': Don't count out an economic downturn just yet

'People give up on recession just as it arrives': Don't count out an economic downturn just yet

The chances of a recession appear to be dwindling as consumers keep spending and the job market stays resilient — but don't count out a recession just yet.

That's according to Société Générale global strategist Albert Edwards, who told Insider there are still plenty of worrying indicators that suggest an economic downturn could happen, even though corporate profits remain on solid footing.

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"Greedflation has just delayed the recession because profits have stayed stronger for longer," he said. 

The worrying signs highlighted by Edwards include the Fed Survey of Senior Loan Officers, which shows that lending standards are tightening across all types of loans at banks nationwide, as well as the continued slowdown in money supply.

"Many leading indicators are signalling recession, and they are not all of a manufacturing bias," Edwards explained. 

Also not helping the broader economy is the fact that interest rates have soared from near-zero at the start of 2022 to over 5% today. The Fed once again raised interest rates by 25 basis points on Thursday, representing the highest fed funds rate in 22 years.

According to Edwards, this could have a devastating impact as the lagging nature of higher rates makes its way through the broader economy.

"Rates have been raised so sharply that demand will now crumble, especially as the Fed says household surplus savings has been used up," he warned.

To be sure, the Fed's staff economists no longer see a recession. But the potential decline in demand that Edwards predicted should hurt corporate profits, which would likely lead to layoffs and a downturn in the economy.

"I am a great believer that the profit cycle causes recessions in the sense that business investment (including inventories) and jobs are slashed as profits fall," he explained.

For now, the economy appears to be on solid footing. Second-quarter GDP growth came in at 2.4%, above estimates for 2%, and jobless claims fell to their lowest level since February.

But that data probably wouldn't change the prevailing bearish view of Edwards, who still sees a recession on the horizon.

"History suggests that people give up on recession just as it arrives,"he said.

Edwards isn't the only bear on Wall Street. In the past week, two vocal strategists dug in their heels and reiterated their negative views, even as the S&P 500 continued to hit new 52-week highs.

JPMorgan's Marko Kolanovic said that while it's difficult to time a recession, asset classes like commodities are still pricing one in. He expects a downturn to occur in the fourth quarter of 2023 or first quarter of 2024.

"Our sector allocation views reflect the challenges of the current environment, namely slow economic growth which can tip into negative assuming recession materializes," Kolanovic said. "The issue of recession timing is uncertain as it is unclear what level of margins will prompt companies to ramp up layoffs."

And while Morgan Stanley's Mike Wilson admitted he was wrong to be bearish on stocks, that didn't stop him from arguing that valuations are set to move lower. He expects the S&P 500 to fall about 8% from current levels to 4,200 by June 2024.

The gloomy stance ties into the worries of Edwards and Kolanovic: the likelihood of a decline in corporate earnings.

Wilson said that falling inflation will lead to falling pricing power for companies, resulting in lower revenues and profits. And as Edwards highlighted, a decline in profits usually leads to an uptick in layoffs, which could ultimately hurl this economy into a recession. Source

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