Goldman's Take on Recession Risks

Chances are, the dreaded “R” word has come up in conversations as of late. Talk of recession risks is everywhere. But people are all over the map in what they mean by “recession.” Axios does a great job in this article by putting recession talk into layman’s terms – a recommended, quick, 2-minute read ahead of our highlight article of the week! 

As Axios highlighted, speculative calls for the U.S. economy to fall into recession are all over the place and it’s important to have the right data as we consider an event that's often discussed with more emotion than fact. 

In this week's highlight article, Goldman Sach's Economics Research team shares the key facts that characterize past recessions, analyzing 77 recessions of advanced economies since 1961.

Key Takeaways:

• Frequency

  • Despite recent jitters, Goldman's Economics Research team still sees the risk of recession within the next year in the US at a 30% chance.

    • This risk is slightly elevated in Europe at 40%, and the UK at 45% probability.

  • The average annual probability of recession in U.S. has averaged 12% since the 1990's

• Severity

  • Current economic conditions in the U.S. paint a mixed picture when trying to determine the severity of a the next potential recession in the U.S.

    • On the optimistic side, large private sector balance sheet surpluses with inflation and wage expectations still anchored, and substantial supply side improvement opportunities remaining in global supply chains point to a more shallow recession. The strength of the labor market – with nearly 2 job openings for every unemployed worker – would also portend a shallow recession.

On the pessimistic side, rising labor costs, elevated inflation, and the total number of expected rate hikes by the Federal Reserve are elevated variables that precede less shallow recessions. 

S&P 500 Performance

We’ve heard a lot of commentary in recent months that investors should be geared up for a prolonged period of weak equity and bond market returns after being ‘spoiled’ for years in an era of cheap money. However, looking at where current returns stack up relative to history, spoiled could be the overstatement of the year. On a percentile basis, the one-year return of -10.7% for the S&P ranks in only the 12 percentile, the 20-year is in the 35th percentile, while the two, five, and ten-year returns are all between the 50th and 60th percentile. A lower (green) reading indicates S&P 500 performance below the historical average, while a higher (red) reading indicates performance that is above average. As the graph below shows, S&P500 performance over the past 20 year stretch, is actually below the long term average, indicating a market that might not be as stretched as most think.

What Else We're Reading

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