Folks, I’m sure you’ve heard a lot of “doom and gloom” financial forecasting this year…
There’s no question that fear sells. And to that point, the media has absolutely reveled in the economic hardships that most investors have endured in 2022.
Now, we’re facing what many observers call the “most widely predicted recession in U.S. history.” And the consensus is that next year will continue to be rough.
But this is where the story gets interesting…
You see, the various branches of the Federal Reserve collect a mountain of data. And they release a heck of a lot of this data to the general public.
One of the standouts is what the Philadelphia Fed calls the Survey of Professional Forecasters. Less formally, it’s known simply as the “anxious index.”
The anxious index is a quarterly report. And the latest update just came out a few weeks ago. By Fed standards, that makes it pretty fresh.
In some ways, the results are what you’d expect. The forecasting pros are feeling very anxious these days. That makes sense given everything I mentioned above.
But I think some of the report’s numbers will surprise you. And perhaps most surprising of all is what it means when the pros feel so anxious.
So today, let’s take a closer look at the latest data together…
At first glance, this chart looks pretty ominous…
The gray areas on the chart are real recessions. And the blue line is the forecasting pros’ perceived probability of declining gross domestic product in the coming quarter.
In other words… the higher the blue line, the more pros believe we’ll see big economic declines. And as you’ll notice, that’s exactly what they’re predicting right now.
Something else is important on this chart. And it’s easy to see. Just look at when the blue line peaks in comparison with the gray areas that indicate recessions.
Since the 1990s, the pros have been largely late on their predictions.
When the pros are feeling their worst, the worst of the problem is already in the past.
That’s intriguing. But it doesn’t necessarily mean we’re past the worst of today’s problems…
You see, when our economic problems were driven by inflation in the early 1980s, the pros did a much better job predicting the pain in real time. And there’s no question that today’s hardships include a major inflation component.
Now, I also promised you a surprising piece of data…
This survey also includes questions about predicted unemployment rates. And the pros expect unemployment to rise – but not by much…
The pros forecast the unemployment rate to move up from today’s 3.7% to 4.2% next year. If that doesn’t sound like much, that’s because it’s not.
That’s less than it was in 2006, not long before the housing bust. And if the pros are right, a tight labor market will continue to push inflation in the coming year.
Put simply, it’s hard to imagine inflation cooling when employers are competing for employees.
So here’s our takeaway today…
The pros are feeling very anxious. And in recent history, that means the worst is behind us.
But looking further back, the pros were able to better time their anxiety in the inflationary period of the early 1980s. And we’re facing a similar situation today.
We also learned that the pros expect a modest rise in unemployment next year. And importantly, it likely won’t be enough to put the brakes on inflation.
So as much as it pains me to throw my hat into the “most widely predicted recession” ring, there’s a good chance we’ll endure a wild market ride again next year.
Align your investment strategy with this reality.
Good investing,
Marc Chaikin
