Why the next economic recovery may be stronger than expected.

Why the next economic recovery may be stronger than expected.

While many investors are focused on the timing and severity of the next recession, Jared Franz has turned his focus to longer term questions: What could be the catalysts for a subsequent recovery? And what are some of the implications of that recovery for investor portfolios?

“If there is one, I believe there are two reasons a recovery will be stronger than prior cycles. First, there may not be a need for large-scale deleveraging like there was during the GFC. Because so many companies have been expecting economic weakness, businesses have taken action, delaying orders to work excesses out of the economy. So, while a recession is likely this year, I expect it will be somewhat shallow.

Second, the U.S. consumer sector is strong relative to past cycles. Healthy job markets, wage growth and household wealth should be key catalysts for a more robust recovery.”

Certainly, the U.S. labor market has been softening recently, and a recession of any magnitude will likely drive unemployment higher as companies announce layoffs. But the labor market has shown continued strength, with 236,000 jobs added in March. Why is that? Structural changes in labor markets have shifted labor supply and demand dynamics.

At the end of March, the unemployment rate stood at 3.5%, near multidecade lows. As the economy slows, unemployment will rise from here, but I believe it will peak around 5.0% and fall more quickly than we have seen in prior business cycles. And, since the start of the pandemic, work-from-home trends, along with the reshoring of supply chains back to the U.S. and the development of sustainable energy, have bolstered real wages, particularly for middle- and low-income workers.

What’s more, at this point in the cycle, consumers have low debt relative to levels coming out of the GFC or even other more typical recessions. At the end of 2022, household debt service as a percentage of income stood at 9.7%.

Sources: Capital Group, Board of Governors of the U.S. Federal Reserve System, Bureau of Labor Statistics, National Bureau of Economic Research. Unemployment rate reflects the seasonally adjusted total unemployment rate. Household debt service payments as a percentage of total disposable income are seasonally adjusted, and the debt service component includes both mortgage payments and scheduled consumer debt payments. Data is quarterly, as of 12/31/2022.

After large declines, markets have rebounded relatively quickly.

Sources: Capital Group, RIMES, Standard & Poor's. As of 12/31/2022. Market downturns are based on the five largest declines in the value of the S&P 500 Index (excluding dividends and/or distributions) with 100% recovery after each decline. The return of each of the five years after a low is a 12-month return based on the date of the low. The percentage decline is based on the index value of the unmanaged S&P 500, excluding dividends and/or distributions. The average annual total returns include reinvested dividends and/or distributions but do not reflect the effect of sales charges, commissions, account fees, expenses, or taxes. Past results are not predictive of results in future periods.

Jared Franz is an economist with 17 years of industry experience (as of 12/31/2022). He holds a PhD in economics from the University of Illinois at Chicago and a bachelor’s degree in mathematics from Northwestern University.

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