Macro Menu: There is More Than “Recession” to Consider
We look at some history to make the point that the word “recession” can get excessive use as there are other potential outcomes.
Dude, he said we need more tariffs.
We provide links to some top-down reviews of important time periods in the markets to offer some context around how much it takes to derail an economy. For 2025, the major industries and consumer health would need much broader problems to undermine a macro backdrop that currently boasts decent trailing earnings, near full employment, and a breadth of scale and diversity that is harder to derail than past cycles. That said, the problems are worsening across many sectors from households to small businesses. There is more to come.
We also see a healthier bank system vs. past cycles and ample credit availability with credit markets the largest in history. The banks are healthy (for now), and the regulatory checks have helped in controlling prop excess and unchecked counterparty risk for legacy regulated banks. Private credit is the new frontier.
The links below provide some of our market history coverage of cyclical downturns of days gone by. The triggers to trouble and contraction risk in the broader economy typically overlap or are led by “credit cycles.” We were part of the credit markets adventure since the 1980s and each move along the trail offers a reminder of how ugly markets can get even as expansions continue. The recent fixation on the word “recession” and handicapping “recession odds” in equity markets can sometimes be a distraction from the main events in markets. There are a wide range of potential outcomes without triggering recession. That includes minimal growth with inflation (see Credit Cycles: Historical Lightning Round 4-8-24, Credit Markets Across the Decades 4-8-24).
The links offer a simple reminder that a lot of major events and macro shifts need to unfold to cause a recession. There can be dramatic swings in capital markets within those expansions as we look at each week in our Credit Market publications.
We also see plenty of examples of false history. Trump was filibustering at length on a CNBC dial-in today. He kept stating that the worst inflation in US history was in 2022, and he made a point to say that 2022 was not just the worst since the early 1980s, it was the worst in history. There have been two worse (much worse) out of the 3 inflation spikes that have transpired since the early 1970s. The 2022 spike was the lightest of the group and did not even bring a recession. It was bad, but facts matter.
Trump also claimed again that Trump 1.0 was the “greatest economy in history,” and that the country was “dead” a year ago (see Trump's “Greatest Economy in History”: Not Even Close 3-5-24). We highlight that sort of rambling as worth considering in the context of his veracity on tariff policy. The resilience of the economy across the inflation spike and for now in the face of a tariff deluge in 2025 is a reminder that “it takes a lot” to cause a recession. The worry is that Trump and tariffs are just getting started and flowing into jobs and household consumption. The small business sector and its problems are a topic they avoid discussing like the plague.
SELECT HISTORICAL RECAPS OFFER SOME REMINDERS
BUSINESS CYCLE CALENDAR
Business Cycles: The Recession Dating Game 10-10-22
Credit Markets Across the Decades 4-8-24
Credit Cycles: Historical Lightning Round 4-8-24 (1987 to 2024 blow by blow)
INFLATION AND EVENT HISTORIES
Inflation: Events ‘R’ Us Timeline 10-6-22
Inflation Timelines: Cyclical Histories, Key CPI Buckets 11-20-23
Misery Index: The Tracks of My Fears 10-6-22
Fed Funds – Inflation Differentials: Strange History 7-1-23
THE STAGFLATION DOUBLE DIP UNDER VOLCKER
UST Moves 1978-1982: The Inflation and Stagflation Years 10-18-23
THE 1990 CYCLICAL TURN
UST Moves: The 1990-1991 Risk Factor Pig Pile 10-24-23
UST Moves: 1988-1989 Credit Cycle Swoon 10-20-23
Greenspan’s First Cyclical Ride: 1987-1992 10-24-22
HOUSING BUBBLE, STRUCTURED CREDIT BINGE, SYSTEMIC CRISIS
Wild Transition Year: The Chaos of 2007 11-1-22
Greenspan’s Last Hurrah: His Wild Finish Before the Crisis 10-30-22
THE 2021-2022 INFLATION CYCLE
Fed Funds, CPI, and the Stairway to Where? 10-20-22
Unemployment, Recessions, and the Potter Stewart Rule 10-7-22
In this low-ambition commentary, the links above look back at some cycles (that mostly ended badly) as a reminder that it takes a lot to go wrong (A LOT!) to cause a recession. That is especially the case in an economy as broadly diverse and of the scale and industry range (notably in services) that we see today. The mildest recession in the group was after the TMT bubble burst, but that comes with the qualifier that Greenspan went off the rails with easing.
The backdrop today is worrisome given Trump’s tariff roll of the dice (using everyone else’s chips) on an unprecedented tariff plan. What we see today so far is mild when framed vs. Oct 1973 (Arab Oil Embargo), the Jan 1980/July 1981 double dip, the July 1990 recession as leveraged credit imploded (securities firms collapsed, thrifts had already blown up, oil had already crashed and brought regional stress, etc.), and the March 2001 TMT recession and market crash. The next crisis of course came with the December 2007 recession onset as counterparty risks, RMBS, and structured credit was ready to turn into a mushroom cloud. The early signs of the pandemic in Feb 2020 turned into a March meltdown.
Tariffs need to do a lot more damage to tip the scales…
While we remain bearish on economic trends in 2025-2026 given our view on tariffs and policy mismanagement, a turn to recession status will take time, more erosion of jobs, more suspended capex, much weaker earnings, and a sustained denial of economic reality.
That is especially the case with the unfolding tariff game plan that raises the risk of a potential disaster in the form of stagflation. Tariffs are still being marketed on the back of too many brazen falsehoods. Just this week, a Trump post stated that “India pays the tariff.” This Trump policy wave has witnessed an abdication of basic economic concepts – supported by his senior staff. Despite those risks, bad policy does not assure recession, which requires more spectacular setbacks.
The last 4 recessions during what we would call the modern capital markets era saw recession onsets in July 1990, March 2001, Dec 2007, and Feb 2020. Each of those saw some extraordinary events setting off a broader macro swoon. We cover those histories in the links above.
There were some severe financial market strains in each of them with July 1990 more concentrated in the securities sector. March 2001 was a very mild contraction as an economic downturn that still saw a material overreaction by Greenspan in 2001. The 1999 to 2002 period was about credit defaults and mild economic contraction.
The Greenspan relief and easing that extended into early 2004 set the stage for the systemic crisis of 2008. Greenspan policies allowed for low-cost leverage bringing record shattering structured credit and leveraged derivatives exposure running alongside a housing bubble. As detailed in the links, the credit market was in a state of disarray by the summer of 2007.
The rebound off the June 2009 trough also brought ZIRP and a minimalist UST curve but came with extensive regulations. We all know what happened in Feb 2020 (March COVID crisis peak) even if memories of convenience (or bad memories in the White House) forget Powell and Mnuchin saved the credit markets and prevented a much more severe bank system crisis and protracted downturn. We suspect Trump forgot to thank Powell.
Uphill climb ahead…
These links above are food for thought. There are a lot more tariffs coming and a rise in the level of political risk and policy execution anxiety that has been known to promote risk aversion. We certainly saw that aversion spike in 1990, late 2007, and then give way to a de facto collapse in risk appetites in Sept 2008. That took a lot of monetary and fiscal actions to get the markets and the economy back in gear.
The pandemic came after the longest expansion in history. The 1990 recession also came after a very long expansion. This current economy has the virtue of being the most resilient but also is getting eroded by reckless, unchecked policies and a Senate GOP leadership team that has turned into what we dub the Castrati Choir. They have abandoned all of their long-held economic convictions and folded in the face of the fear of Trump’s vindictive use of power. This creates unfavorable policy risk symmetry since it all turns on one ideologue who could use some “intro economics study time.”