Odds of recession low in coming year, advisors say

Odds of recession low in coming year, advisors say
From left: Tim Holland, Dave Alison, and Don Bennyhoff
Financial advisors generally agree with a recent survey of economists that the odds of a recession in 2025 remain small.
JAN 24, 2025

Fewer and fewer Wall Street economists see a recession hitting the economy in the coming year.

Is that a good thing?

Back in January 2023, the Wall Street Journal released a survey of economists that placed the odds of a recession in the ensuing 12 months at more than 60 percent. At the time, the Federal Reserve was in the process of raising rates to combat inflationary forces that most market participants believed would seriously slow the economy.

Nope. Turns out the recession never arrived as predicted by the majority of those economists. The gross domestic product (GDP) of the US in 2023 was $27.36 trillion, a 6.3 percent increase from 2022, the highest GDP ever recorded in the United States.

Skip a year ahead to 2024 and almost a third of economists surveyed by the WSJ forecast a recession. Yes, a lower number than the previous year, but still fairly high as forecasts go.

Nevertheless, once again, the result was a domestic GDP up over 5 percent to slightly under $29 trillion.

That brings us to the latest WSJ survey of economists for 2025, which shows the probability of a recession in the next 12 months at 22 percent, the lowest in three years.

Should financial advisors and investors put their faith in those recession odds? Or should they use the survey results as a contrarian indicator?

“The probability of a recession still exists, albeit market consensus is lower than the beginning of last year,” said Walker Williams, chief market strategist for private wealth at Lido Advisors.

As for the headwinds that could potentially intensify and raise the possibility of a recession this year, Williams points to rising pressure on what has been a surprisingly resilient consumer. He pointed out that consumer debt is up significantly, and savings rates remain low and well below the long-term average.

Regarding what economists may have overlooked in their predictions in the last two years that caused them to believe a recession was more likely in the offing, Williams said it could have been that rising unemployment did not impact consumer spending as much as anticipated.

“Historically speaking, increasing unemployment has directly impacted consumers and led to decreased economic activity. The US consumer is the largest contributor to GDP,” Williams said.

Tim Holland, chief investment officer at Orion, flat-out said he does not expect a recession in the coming 12 months. At least not as of today.

“The US is a consumption, consumer-led economy, and while there are signs of stress among lower income consumers, on balance the US consumer is in solid shape, buttressed by record US household wealth and a jobs market carrying a 4-plus percent unemployment rate. If the US labor market hangs in there, the US consumer should hang in there. And if the US consumer hangs in there, the US economy should be fine,” Holland said.

Holland admits to being overly pessimistic himself in 2023, saying that in hindsight he failed to appreciate the long-lasting impact that government stimulus programs had on the consumer and the corporate sector.

Meanwhile, Dave Alison, president and founding partner of Prosperity Capital Advisors, forgives the economists who may have blown their past recession calls. In his view, it’s almost a fool’s errand to even try to predict the economic future because it is a “complex system influenced by countless factors, many of which are random or difficult to forecast with accuracy.”

Further, he said he believes that even if a recession does occur, history shows that the stock market doesn’t necessarily correlate directly with recession timing.

Looking back, he said economists underestimated the resilience of the consumer to continue spending and companies’ ability to adjust expenses and sustain profits. Additionally, he said the AI boom drove significant investment in data infrastructure and innovation, which provided an unexpected tailwind for economic growth.

Moving on, Matthew J. Spradlin, wealth manager and director at the Godfrey & Spradlin Group at Steward Partners, said he does not believe a recession is likely in the next 12 months. In his view, the winds of change are strong in DC and there appears to be renewed optimism surrounding the incoming administration, particularly amongst the business community, albeit with an air of caution surrounding potential inflationary impacts.

“In my almost 25 years of following the economy and markets, I have seen the country talk itself into economic decline, meaning a few economists and strategists share a dire forecast, which is picked up by the media, which then begins to snowball, this concern is then consumed by business owners who begin preparing for a slowdown by scaling back and this leads to a self-fulfilling prophecy,” Spradlin said.

As to what the wide swath of economists missed in their recent recession calls, he highlighted “the ramifications of all policies implemented, both fiscal and monetary, to combat the economic fallout from the pandemic were going to be difficult to predict in the years that followed.”

Elsewhere, Will Sterling, partner and chief investment officer at TritonPoint Wealth, said the policies on both the fiscal and monetary sides don’t lend themselves to a recession forecast for the next 12 months. That said, Sterling remains ever cognizant of “unexpected shocks.”

Sterling also said economists failed to grasp the impact of immigration in recent years which likely impacted their recession calls.

“Over the last few years, greater than 50 percent of labor force growth has been by foreign born employees. This cohort of workers propelled labor force growth while concurrently pulling down average hourly earnings – a positive for the economy during a time of higher realized inflation. Data for foreign born employees is often difficult and imperfect, but directionally this was an important catalyst that many economists understandably failed to see,” Sterling said.

Finally, Don Bennyhoff, founder at fractional CIO firm Bennyhoff & Co., resisted making a recession call, stating instead that "the only reliable expectation about the future is to expect the unexpected."

“While economists and other forecasters have a job to do, their success rates leave a lot to be desired. It’s not because they’re unintelligent, but divining the future is difficult at best,” Bennyhoff said. “I feel that a more prudent approach is to assume that the market already reflects the best guesses for future outcomes and realize that investor success is affected more by their behavior than by their portfolios.”
 

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