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May 2023

Darkening Economic Clouds Presage a Mild Recession

Key Points

  • Indicators pointing to economic slowdown
  • Mild recession expected
  • Portfolios positioned defensively

When one sees clouds on the horizon, you usually can get a sense of how much rain is coming by determining if all directions are dark or if there are only small, isolated clouds, which would hopefully mean no rain.

We have been forecasting a coming storm since the spring of 2022, and recently, when we look across all the economic indicators that we monitor, what we see are clouds forming in almost all directions of the economy. 

Among the key indicators we monitor that have strong historical correlations with recessions are:

• Short term interest rates rising, inverted yield curve

• Significant contraction in money supply

• Tightening bank lending constraints

• Declining consumer excess savings

• Declining trucking survey readings

• Reversal in positive consumer net worth to negative trends in net worth

• Declining Federal Reserve balances, negative money supply

• Rise in unemployment claims

• Negative trends in corporate earnings

• Declining business optimism


All of the economic indicators on this long list are now in downtrends that are growing more pronounced, persistent and pervasive, making a recession in the second half of 2023 much more likely.

When we think about recessions, we know that their starting point is usually based on the behavior of the consumer. The chart below shows that unemployment claims have recently turned up. Turning points in this trend are a key indicator correlated with recessions. 

Chart 1: Initial Jobless Claims
(4 Week Moving Average)

Source: St. Louis Fed, as of April 2023.

Both businesses and consumers rely on the availability of credit to support their buying and spending decisions. Banks are the primary source  of credit, and chart 2 below shows the significant declines in bank deposits, with a negative reading in March, which is a rare occurrence. The amount of bank credit issued has declined recently as well (chart 3).


Both are correlated with declining economic activity and, potentially, rising recession risks.

We maintain our view that inflation will persist for longer than the majority anticipates, and that interest rates will remain high for the foreseeable future. This means more restrictive bank lending, which in turn means slowing consumer and business spending.

The good news is that any recession ahead is likely to be mild and shorter by historical standards. Despite growing headwinds, consumer and corporate balance sheets generally remain in good shape, which should mitigate against a more significant retrenchment in economic activity that would occur in a normal recession. 

Given this, our investment allocation to stocks for the time being remains modestly below normal levels, and we have increased our allocation to investment grade bonds, which should lower overall volatility in client portfolios and offer a predictable income yield. Please reach out to your financial professional to review your portfolio goals and objectives.

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