Confusing Economic Signs

Googling “US economy” recently, I got the following headlines as the top two results:

• “US Economy Is Doing Better than Americans Think”
• “Famous Economist Who Predicted 2008 Recession Issues VERY Grim Warning over Future of the US Economy”

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Such is the challenge in evaluating the health of the economy in real time. Economic indicators, unlike markets, are backward-looking. The National Bureau of Economic Research (NBER) tends to declare recessions on a lag. The 2020 recession was declared in June, but later determined to have ended in April—two full months before the start was announced.

Part of the uncertainty may stem from the fact that not all economic measures go south during a recession. For example, recessions are usually associated with negative GDP growth, but GDP changes were positive on average during some recessions, such as the ones starting in 1960 and 2001. High unemployment is also considered characteristic of a recession, and yet four of the recessions since 1950 had unemployment below 6%.¹ Investors’ views on where the economy is headed may hinge on how much weight they give to different indicators.

There’s also dispersion in opinions about these indicators.² The median projection for GDP growth by the end of 2024 is 2.6%, which is actually up slightly from the last survey at 2.5%. But the range of projections is substantial. Some analysts gave a nonzero probability to GDP growth coming in below –5%. On the other end of the spectrum, GDP growth over 9% was viewed as plausible. Most analysts revised upward their expectation for unemployment—median projection went from 3.9% to 4.1% between surveys—but with a similarly wide range.

Finally, even if you fall in the camp that is pessimistic about the economy, the history of markets shows that stock returns have often been positive during recessions—the cumulative return on the US market was positive in 12 out of 16 two-year periods that began at the onset of a recession.³

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Exhibit 1

Conflicting Messages

Google search screenshot from August 26, 2024

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This article originally appeared in Above the Fray, a weekly newsletter for Dimensional clients. It was not created, written, or produced by TwoTen Planning.

Cumulative return shows the growth of a hypothetical investment of $10,000 in the securities in the Fama/French Total US Market Research Index over the 24 months starting the month after the relevant recession start date. The sample includes 16 recessions as identified by NBER from October 1926 to February 2020. NBER defines recessions as starting at the peak of a business cycle.

Index Descriptions

Fama/French Total US Market Research Index: July 1926–present: Fama/French Total US Market Research Factor + One-Month US Treasury Bills. Source: Kenneth R. French - Data Library (dartmouth.edu).

Results shown during periods prior to each index’s inception date do not represent actual returns of the respective index. Other periods selected may have different results, including losses. Backtested index performance is hypothetical and is provided for informational purposes only to indicate historical performance had the index been calculated over the relevant time periods. Backtested performance results assume the reinvestment of dividends and capital gains. Profitability is measured as operating income before depreciation and amortization minus interest expense scaled by book. Eugene Fama and Ken French are members of the Board of Directors of the general partner of, and provide consulting services to, Dimensional Fund Advisors LP.

Footnotes

1. 1. Gross domestic product (GDP) is based on quarterly data from the US Bureau of Economic Analysis; quarterly data is not available prior to 1947. Percentage change in GDP is based on the business cycle peak to trough quarter as reported by NBER. Industrial production, inflation, and unemployment are based on monthly data from the Federal Reserve Bank of St. Louis (FRED); unemployment data is not reported prior to 1929.
2. 2. “Third Quarter 2024 Survey of Professional Forecasters,” Federal Reserve Bank of Philadelphia, August 9, 2024.
3. 3. Past performance is no guarantee of future results. In USD. Performance includes reinvestment of dividends and capital gains. The Fama/French indices represent academic concepts that may be used in portfolio construction and are not available for direct investment or for use as a benchmark. Index returns are not representative of actual portfolios and do not reflect costs and fees associated with an actual investment. See “Index Descriptions” for descriptions of the Dimensional and Fama/French index data.

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