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Historical Cicada Cycles and Current Recession Prospects

While scrolling through Instagram, I stumbled upon a recent SNL clip featuring two “cicadas” at the Weekend Update desk. These cicadas were highlighting the emergence of two specific broods (Brood XIX and XIII) this summer, spanning 17 states in the Midwest and Southeast—an event that hasn’t occurred in 221 years. The actors, portraying cicadas, humorously boasted about the loud and lively “party in the stump” they were planning. 😂 Thanks to these large, crunchy insects, many people will experience a noisy summer, at least for several weeks.

This made me reflect on how economists and strategists sometimes behave similarly. They emerge to make a big noise about their predictions and then disappear, especially when their forecasts are inaccurate. Having spent most of my career in client-facing roles, I’ve always valued those who revisit their predictions, explain why they may have missed the mark, and update us on their current thinking.

So, I was pleased when a colleague recently asked me directly: “Do you still think there could be a recession?” (referring to this post).

The short answer is yes—particularly in the consumer sectors of the market. However, it’s taking longer to materialize than I initially anticipated.

For context, back in September 2023, I wrote about the potential for a recession, highlighting: 1) higher interest rates were likely to be felt sooner rather than later, and 2) discretionary spending might decline as inflation remained stubborn while consumer companies would struggle to maintain their earnings due to a lack of pricing power.

Here’s my current perspective:

  • Although higher rates caused some initial disruptions in 2023 (with regional banks posting losses on longer-term bonds and even one bank failing), the noise is gradually intensifying, much like the cicadas. Concerns are growing over commercial real estate, the stagnant housing market, and rising credit card balances.

  • We’re currently witnessing a spending slowdown in the retail sector. Major retailers like Walmart, Target, and fast food giants like McDonald’s have all reported a softening in demand in their earnings reports. They’re also reducing prices in response to the slowing consumer demand.

Why is this Taking Longer?

Several factors contribute to the delay:

  • Corporate Cash Reserves: Companies still possess substantial cash reserves.

  • Consumer Liquid Assets: Although reduced, many consumers continue to hold liquid assets at varying levels. For those who have maintained their wealth, there's a noticeable fatigue from inflation, leading them to be more selective in their spending.

  • Federal Government Cash Infusions: The government has been distributing significant funds. The $50 billion CHIPS Act is boosting investments in the tech and science sectors, and the Inflation Reduction Act injects $391 billion in funding, tax incentives, grants, and subsidies towards energy, albeit without successfully reducing the deficit yet. These initiatives, while well-intentioned, add to the existing spending and increase the deficit, making it challenging to achieve lower inflation levels.

As long as inflation persists, interest rates remain high, causing consumer fatigue, which appears evident now. Consequently, a recession in the consumer sectors remains a possibility, albeit unfolding more slowly than initially anticipated—not quite as long as it takes a cicada to re-emerge.

By understanding these dynamics, we can better grasp the interplay between corporate financial strategies, consumer behavior, and government policies in shaping economic trends. These insights are crucial for navigating the complexities of the current economic landscape and anticipating future shifts in the market.

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