Never have so many people been so wrong in predicting a recession

<p>What happened here?</p><p>At the turn of the year, you couldn't get away from recession calls. It was a complete consensus, with <a href="https://www.forexlive.com/news/4-trading-themes-for-2023-1-never-underestimate-the-spending-power-of-the-us-consumer-20230101/" target="_blank" rel="follow">only a few voices</a> saying otherwise.</p><p>Instead, it's turned into a red-hot economy with jobs growth beating estimates for 14 months in a row — and likely 15 if <a href="https://www.forexlive.com/news/us-june-adp-employment-497k-vs-228k-expected-20230706/" target="_blank" rel="follow">today's ADP jobs report</a> is any indication.</p><p>How did so many people miss it?</p><p>I'd argue it's been part of the same story since covid hit: A slavish dependence on correlations and an inability to think creatively is at its core.</p><p>Many people were predicting a recession simply based on a contraction in the ISM manufacturing index, as if we didn't have a massive bullwhip effect because of factory shutdowns and shortages.</p><p>You can extend that same thinking to the consumer where no one seemed to factor in an enormous wealth effect from housing and 30-year fixed rates. The wealth effect even extends to stock markets where even at the depths of last year, the S&amp;P 500 and Nasdaq were still well-above 2019 levels.</p><p>Thirdly, economists broadly overestimated the impact of Fed tightening and underestimated the impact of fiscal stimulus. The PPP program was an utter fiasco. There are estimates of $200 billion of fraud in the $800 billion program and I'd suspect that's outright fraud with at least double that amount when you include dishonesty. It put way too much money in the hands of people with a high propensity to spend.</p><p>Finally, the IRA program was misunderstood because so much of that spending was pushed into the future: It's just starting to hit now.</p><p>This chart has been doing the rounds for awhile but it's truly astonishing.</p><p>Even more astonishing is that not a single dollar of the CHIPS act has been spent yet.</p><p>What's the lesson here for traders? For me, it's to avoid the overused charts showing correlations. The pandemic upended so much of that and led to some of the worst collective calls in memory. </p><p>For now, the consensus is still for an imminent recession (and I wouldn't lead too hard against that) but it's worth considering where we were 18 months ago and where we are now: The future is hard to predict. Can we really rule out +6% Fed funds? And it's only a matter of time until the BOJ is forced into what could be the messiest pivot in central bank history.</p>

This article was written by Adam Button at www.forexlive.com.