The U.S. economy has spent most of its history in growth mode.
The last recession we had occurred during the onset of the COVID-19 pandemic, starting in February 2020 and concluding just two months later. It was the shortest recession in history.
What if recessions aren’t a thing anymore?
It’s a thought-provoking idea raised on two recent episodes of The Compound & Friends podcast.
Specifically, it’s the idea that the economy doesn’t expand and contract like the expected ebbs and flows of the tides. Sure, the economy will continue to be susceptible to major shocks. But it won’t cycle for the sake of cycling.
Here’s BlackRock’s Rick Rieder on the Dec. 13 episode:
“I don’t think the U.S. economy goes into recessions. Unless it’s a pandemic or financial crisis. … I know it’s a crazy statement, but I have a very strong point of view. 70% of consumption in the United States is driven by services today. The services economy has only gone to recession twice in 75 years: the pandemic [and] financial crisis. When you have a service-oriented economy where people spend on health care, education, what they spend on their phone bill, their cable, etc. — it’s incredibly constant. Unless you have some systemic shock, this whole idea of hard landing, soft landing … I just don’t think it lands. And I’m not saying there’s not iteration around a trend that generally is driven by the demographic. But I just don’t believe in this cyclical …“
This chart shows how services has grown as a share of personal consumption expenditures.
Regarding cyclicality, JPMorgan Asset Management’s David Kelly made a similar point.
In the Oct. 11 episode, Ritholtz Wealth Management’s Josh Brown asked Kelly: “Can a services-based economy as advanced as ours even have a recession minus an exogenous shock? There doesn’t seem to be a business cycle anymore.”
Here’s Kelly’s response:
“People always ask me, ‘Are we early cycle or mid cycle or late cycle?’ We’re post cycle. … I’m not saying that we couldn’t end up in recession. What I’m saying is we had our period of, ‘Okay, the economy was booming, and inflation went up, and the Fed raised rates, and that was supposed to kill inflation, but it’s going to kill inflation by killing the economy.’ And yet, the inflation came down, but they didn’t kill the economy. So that didn’t work out. But that moment of tension is behind us. We’re now on this soft-landing path. We’ve been on the soft-landing path for a number of years, actually, with inflation gradually coming down [and] unemployment at 4%. We hit 4% unemployment in December 2021. As we had all of 2022, all of 2023, and most of 2024, it’s just basically at full employment. So I think that’s where we are.
And I think part of it’s manufacturing. Manufacturing is a smaller part of the economy. The other thing is inventory control. … It used to be you have a slowdown. But the guys at GM would never figure it out until the cars were stacked up 10 on top of each other. … If you look at the data we have on inventory/sales ratios from the ISM on whether inventories are too high or too low, it’s flat as a pancake. Inventories are almost exactly right. … That can be a problem sometimes. But in a normal economy, it keeps you out of that trouble. So it does take a shock with this economy. … But of course, eventually something like that will happen.”
So Rieder’s point is that a services-oriented economy is less susceptible to swings in activity. Kelly’s point is that even the manufacturing side of the economy is run much more efficiently and flexibly than it used to be.
In time, we’ll see how right these views prove to be.
That said, I think the value of labeling the economy as being in “recession” or “expansion” warrants further discussion.
The U.S. economy is incredibly complex, and reducing the state of its health to a single word is arguably malpractice.