Why 2024 Won't Be "Great Recession 2.0"

In last month’s article, we outlined our revision to our outlook for the US industrial sector. We covered the driving factors to the revision itself and the factors that will keep the upcoming recession “mild” – more akin to the early-1990s or early-2000s recession than the Great Recession. Here, we will expand on those positive factors.

1. For consumers: record consumer spending, robust real income, low credit burdens

Consumer spending, as measured by US Total Personal Consumption Expenditures and adjusted for inflation, is at record highs. At the same time, Real Personal Income (excluding transfer receipts) is hovering around record highs. We track income “excluding transfer receipts” to adjust for the massive amounts of government stimulus that was disbursed during the pandemic. The Expenditures and Income figures alone suggest that consumers are broadly on solid financial footing and will be able to weather higher interest rates and hawkish Federal Reserve policy relatively well. In addition, consumers generally have exceptional room to borrow. Household credit card debt as a percentage of median annual earnings averaged just under 13% in the third quarter (latest available data). The pre-pandemic five-year average was roughly 14.7%, and, leading up to the Great Recession, credit card debt rose above 20% of median annual earnings. The current low levels of credit card debt burden suggest consumers have some cushion to borrow before their finances become shaky. It is important to note, however, that lower- and fixed-income consumers are likely to be hit harder by the recession, having already been squeezed by inflation. Higher-income consumers and those in lower-cost-of-living areas are likely to fare relatively better throughout this time.

2. For businesses: record profits, robust backlogs, and reshoring trends.

US Corporate Profits for the third quarter of 2022 (latest data) were virtually even with the record second quarter, indicating relative success at navigating elevated inflation, supply chain snags, and waning cyclical momentum both at home and abroad. During the pandemic, supply chains became so tangled that even now the Global Supply Chain Pressure Index is elevated relative to normal levels. Many businesses were unable to fill orders amid stimulus-fueled record demand, leading to elevated backlogs. Lead times remain elevated in a variety of industries, suggesting backlogs are likely to stay relatively robust, easing some of the impact of current higher interest rates and tempering industrial sector decline. Finally, onshoring and reshoring trends – in part efforts to avoid future supply chain disruptions – are a positive trend for US businesses.

Given the consumer and business strengths laid out above, we expect the 2024 recession to be relatively mild compared to historical cycles – the expected decline in annual US Industrial Production, peak to trough, will come in at 2%−3%. However, there is risk that the Federal Reserve Board will keep interest rates elevated longer than anticipated, given the body’s recent hawkish rhetoric. If the yield curve remains inverted beyond 2023, it would indicate a risk to the anticipated timing and amplitude of the upcoming recession in the industrial sector. We will be watching the above factors closely to determine if new risks are developing. For example, while backlogs are elevated, order cancellations are more likely on the back side of the business cycle.