Now that everyone agrees that we’re headed towards a recession, let’s look at the alternative case.
Inflation is probably here to stay (compared to the last many years). It it stabilizes in the 4.5% range though, we may be able to avoid a Fed -induced recession. (That how the 1970s/80s stagflation was finally controlled.) So can we settle in at that inflation rate?
The New York Fed publishes an “underlying inflation” value which historically predicts the CPI. (That’s the “fake” CPI because it excludes food and energy for autos and winter heating, but that’s a different discussion.) Right now, the underlying rate is more than 2% below the CPI, which suggests CPI may fall within a few months.
Furthermore, the ISM prices paid index dipped in October, which might imply that supply chain issues are declining. And earnings calls from publicly traded firms are mentioning lower commodity and material costs.
In addition, Susan Collins (president of the Boston Fed) recently started talking about Fed policy requiring smaller hikes.
None of these items point to a slam dunk view that we won’t see a 2023 recession; they’s just solid support for the alternative view. For an even softer supporting view, let’s look at Citigroup’s sentiment calculation, which they call the Levkovich Index. That index has been moving up, out of what Citigroup calls “panic” and still far from what the index calls “euphoria.” Then again, getting an accurate prediction of the future from these charts is a bit like reading tea leaves.
Will we see a 2023 recession? Hard to say, but perhaps there's hope we can avoid one.
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