David Rosenberg: The Recession Is Here, and the Fed Is Unaware

Recession Confirmation

• 💡 The Beige Book and FOMC minutes indicate that 75% of the U.S. economy is contracting or stagnating, suggesting a recession has likely begun.
• ⚠️ The Fed's own economic staff now see recession odds as high as their base case scenario, a significant shift from previous assessments.
• 📉 Historical data shows that two consecutive years of approximately 1.5% real GDP growth, as forecasted by the OECD, have always included a recession.

Factors Masking Economic Pain

• 💸 Over $2 trillion in post-COVID stimulus checks were unexpectedly fully spent by households, not saved as traditionally expected, masking underlying economic weakness.
• 📈 Government spending remains 53% higher than pre-COVID levels, with deficit-to-GDP ratios exceeding 5% for five consecutive years, creating an illusion of prosperity.
• 🚫 The era of fiscal stimulus is over, with estimates suggesting fiscal drag on the economy heading into the next year.

Federal Reserve Policy Errors

• ⚠️ The Fed's aggressive tightening cycle in 2022-2023, unprecedented since the early 1980s, was a significant policy error that should have triggered recessions.
• 🎯 Jay Powell's focus on legacy and credibility, particularly after misjudging inflation as transitory, leads to a hawkish stance and a reluctance to cut rates.
• 📊 The Fed is criticized for fighting the last war and focusing on lagging indicators rather than forward-looking data, ignoring its own Beige Book and staff forecasts.

Signs of Economic Contraction

• 🏠 Housing affordability is severely out of balance, with punishingly high mortgage rates and a significant gap between qualifying income and median first-time buyer income.
• 📉 Consumer spending is contracting, evidenced by declining retail sales volumes and auto sales, while business investment in capital expenditures is stalled.
• 🏭 The housing market, a significant economic driver, is already in a recession of its own, with negative starts, permits, and construction.

Labor Market Weakness

• 📊 The birth/death model, which accounts for a significant portion of reported payroll growth, tends to exaggerate job increases and mask underlying weakness.
• 📉 Year-over-year payroll growth, as indicated by the Quarterly Census on Employment and Wages (QCEW), is significantly lower than reported non-farm payrolls, suggesting overstatement.
• ⚠️ A decline in small business employment, as seen in ADP data, and an increase in layoffs over new hires in JOLTS data signal a cooling labor market.

Market Sentiment and Outlook

• 🚫 There is a concerning lack of recession pricing in both credit and equity markets, indicating widespread investor denial.
• 📈 Uncertainty, particularly around tariffs and fiscal policy, is at a three-standard-deviation event, unnerving the private sector.
• 🏦 Outside of AI and data centers, there is little visible vitality in the U.S. economy, with Treasuries presenting a compelling trade opportunity.