The podcast's economists assess the probability of a recession in the next year at 40-45%, significantly higher than the consensus view of 25-30%. This heightened risk is based on deteriorating labor market trends and is corroborated by Moody's own machine learning models.
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The sharp drop in the fiscal impulse represents a direct, dollar-for-dollar hit to nominal GDP that has already occurred. This indicates a recession is underway, not forthcoming. The National Bureau of Economic Analysis (NBER) will likely backdate the start of this recession to the third quarter of 2025.
Contrary to popular belief, the US already underwent a recession in early 2024, particularly for the average consumer ("Main Street"). This was masked by the AI sector boom and soaring asset prices. Revised labor data supports this view, and the economy is now in a reacceleration phase.
The primary economic concern is not a cyclical recession but a structural slowdown in the economy's underlying trend growth. This is driven by long-term factors like restrictive immigration policies that impact labor supply and productivity, creating a persistent headwind even without a formal downturn.
The job growth diffusion index, measuring the share of industries expanding payrolls, fell to 47.6 in October. A reading below 50 has historically signaled a recession, indicating that current job gains are dangerously concentrated in just a few sectors like healthcare.
The current labor market is characterized by both low hiring and low firing rates. While this appears stable, it makes the economy fragile and more vulnerable to negative shocks. Unlike a high-churn environment, there is little buffer to absorb a sudden downturn, increasing the risk of a rapid deterioration.
A major disconnect exists between Wall Street and Main Street. While jobs data points towards a potential recession, the S&P 500 is hitting record highs. Since recessions are historically preceded by market downturns, investors are signaling a strong disbelief in the negative labor market signals.
Despite weak underlying economic data, the probability of a recession is not over 50% due to anticipated policy stimulus. This includes Fed rate cuts, major tax cuts, and deregulation, which are expected to provide significant, albeit temporary, economic support.
The Sahm Rule provides a clear signal that a recession has begun: when the three-month moving average unemployment rate rises by more than 0.5 percentage points above its low from the previous year. This metric is useful for cutting through noise and identifying when a slowly weakening job market has definitively tipped into a downturn.
Joe Davis argues the economy faces a "tug of war" between an AI-driven boom and a deficit-fueled slump. He believes the mainstream forecast of stable 2% growth and 2% inflation is the least likely outcome, with an over 80% chance of a material change in the economic environment.
Fed Chair Powell highlighted that annual benchmark revisions to labor data could reveal that the U.S. economy is already shedding jobs, contrary to initial reports. This statistical nuance, creating a "curious balance" with a stable unemployment rate, makes the Fed more inclined to cut rates to manage this underlying uncertainty.
