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Weekly Economic Perspectives

Weekly Economic Perspectives

December 29, 2023

Weekly Economic Perspectives is intended to share timely and relevant market and economic news and data that we are observing, which help to frame our outlook.  We hope that you find this timely and interesting.


We took last week off for the Christmas holiday, but are back at it for the last week of the year!  We hope that you have had an enjoyable holiday season and we wish you a Happy New Year!

Economic Indicator Review

With the consecutive holiday shortened weeks, there hasn't been much economic data released.  Instead, we would like to share several slides from a webinar with our research partners, Hedgeye Risk Management, LLC, that help to shed light on the economic landscape.

The first slide below provides context for what a recession actually is.

Source: Hedgeye Risk Management, LLC

The fourth bullet point came under significant scrutiny in 2022 where we had two consecutive quarters of negative GDP growth and yet the National Bureau of Economic Research (NBER) did not indicate that period as a recession.  There have been other periods of time where this has happened, which Hedgeye has identified below.  There was a period in the 1960s and in the early 2000s where we had two non-consecutive quarters of negative GDP growth but both of those periods ended up being identified as a recession.

Source: Hedgeye Risk Management, LLC

The next three slides shed some light on where we are within the context of whether a recession is probable or not.  The first slide shows the depth and length of the yield curve inversion that we have had for the past several years and how that compares historically.  The current inversion has been the most severe since the 1980s and also has been the longest since then.













Source: Hedgeye Risk Management, LLC

The next slide pulls data from the Federal Reserve Bank of New York which provides their measurement of the probability of a recession occurring within the next 12 months.  In early 2023, the probability was north of 70%.  This was consistent with many economists and institutions projections for the year, given the level and the speed at which the Federal Reserve had raised rates starting in 2022.  Clearly, this did not come to fruition in 2023.  However, the Bank's model still shows a probability above 50% for a recession to occur in the next 12 months.

Source: Hedgeye Risk Management, LLC

Lastly, the slide below shows the 10 year US Treasury yield and the components that make up the level of the yield, growth expectations as measured by the 10 year US Treasury Inflation Protected Security (TIPS) yield, which strips out inflation, and the 10 year breakeven rate, which shows what the market expects inflation to be over the next 10 years, on average.  The blue bars show the current breakeven rate and the red line shows the current TIPS yield.  What's striking is that inflation expectations are largely unchanged month over month while the TIPS yield is plummeting.  This tells us that the recent drop in rates isn't because of inflation expectations coming down but rather an expectation of slowing economic activity.

Source: Hedgeye Risk Management, LLC

In summary, while we don't hope to go through or have a recession, elevated levels of inflation, an uncertain picture on the trajectory of economic growth and the unusual length of an inverted yield curve give us enough reason to take caution when evaluating the state of the economy.

Have a Happy New Year!


Gordon Asset Management, LLC Investment Policy Committee