During 2024, experts repeatedly warned investors about a possible recession in the United States. Among the forecasters were both representatives of the world's leading financial institutions, banks, and legendary investors Warren Buffett and Jim Rogers.
Their forecasts were based on various economic indicators, including inflationary processes, geopolitical instability and fluctuations on stock markets. However, at the end of the year, expectations were not met: the U.S. economy continued to grow steadily.
Why did the forecasts fail to materialize, what should investors expect from 2025 and what market strategy should they follow? The answers to these questions are in Finam.ru's review.
Like weather forecasts
Usually everyone tends to blame the weather forecasters for their weather forecasts not coming true. But, as practice shows, forecasting is generally a thankless occupation. Even economists make mistakes. And 2024 has once again confirmed this thesis. Since the beginning of the year, investors have been spreading forecasts about the onset of recession in the U.S. economy. Analysts were seriously panicking, trying to protect everyone from repeating the lessons of the past, associated with the Great Depression and the financial crisis of 2008.
In particular, just a couple of months ago, the famous investor Jim Rogers warned that the U.S. economy was on the verge of an “extremely serious” recession. The same one who co-founded the famous Quantum fund with billionaire George Soros in the 1970s. “I do know there’s going to be a recession again, and I do know it’s going to be extremely bad,” he told reporters in October.
Rumors of a recession in the U.S. economy this year have been fueled by another equally famous investor, Warren Buffett. Many considered the recent decision of his company Berkshire Hathaway to sell almost half of its stake in Apple, while reducing stakes in other major companies, as an indication not just of a tactical reorientation, but rather that the economic prospects of Americans are not as bright as it might seem. And it's true, Apple shares have been in Buffett's portfolio since 2016, and they've taken up a sizable share of more than 40%.
Great gurus in their gloomy forecasts were echoed by great bankers. However, the latter subsequently backtracked. Thus, in the spring of this year, Jamie Dimon, CEO of JPMorgan Chase, predicted that the probability of recession in the U.S. is 65%. But almost six months later, the bank's economists said that they no longer expect a recession in the United States. What's more, they have upgraded their assessment of the country's economic growth. “GDP is growing at a healthy pace,” is how they explained their decision.
During this year, Goldman Sachs, which also revised their recession forecast, “reobraced”. At first they talked about a 20% probability, but by the fall their forecasts “warmed up” to 15%. Then economists cited data on retail sales and jobless claims - while the former increased, the latter fell.
Bank of America was among those who predicted a recession in the US in 2024. However, at the end of this summer, the country's second largest bank also abandoned its forecasts. Then the CEO of the organization Brian Moynihan said that the recession in the U.S., which everyone feared so much, is no longer expected, as the Fed's efforts to curb inflation while keeping the U.S. economy afloat are yielding results.
His remarks almost coincided with a statement from U.S. bond giant PIMCO, which in August also expressed hope that the U.S. could avoid a recession.
Change of seasons
Economists' forecasts do change like the seasons in Russia. And if a few months ago they represented winter cold, now they represent pleasant summer heat. As early as 2025, many experts promise outpacing economic growth in the United States. In particular, Goldman Sachs, Ford Motor, KPMG and Wells Fargo all claimed last month that there is only a 27% chance of a recession in the next 12 months.
The U.S. economy is likely to expand by 2.1% next year, showing solid growth above the expected long-term trend according to the Dutch information company Wolters Kluwer.
The Fed estimates the U.S. economy will grow by 1.8% annually over the long term, according to the regulator's average forecast released in September. Recall that, contrary to recession forecasts, U.S. GDP grew 1.4 in Q1, 3% in Q2 and 2.8% in Q3, according to the Bureau of Economic Analysis.
“The recent performance of our economy has been remarkably good, by far the best of any major economy in the world,” U.S. regulator Chairman Jerome Powell said at the end of the year, expressing confidence that the central bank could sustain GDP growth, ensure a healthy labor market and slow inflation to its 2% target with an ‘appropriate recalibration’ of monetary policy.
According to the Atlanta Fed, GDP is likely to expand at a 2.5% annualized rate during Q4. And according to economists surveyed by Wolters Kluwer, the U.S. economy will end the year with GDP growth of 2.7% versus the previously forecast 1.6%.
How many degrees Fahrenheit?
So why did the recession forecasts initially turn out to be wrong? The harsh truth is: why there is no perfect indicator. Past years bear witness to this. For example, the Conference Board's leading economic index signaled a recession as early as 2022. And a highly valued recession indicator with an inverted yield curve has been activated since November 2022. Even the common layman's definition of recession - two negative quarters of GDP (occurred in 2022) - has been rendered useless. And as recently as early August 2024, the Sahm rule, which measures short-term increases in unemployment, also sent a recession signal. But there was no recession in the U.S., and there still isn't one.
The creators of these indicators themselves attribute the false positives to several factors, Yahoo Finance has learned. First, according to them, the distortion of economic data was caused by the global pandemic COVID-19, which undoubtedly complicated the forecasting process. Second, in general, economics as a science is so complex that it is hardly possible to make a perfect forecast in advance. Rather, the onset of a recession can be reported ex post facto. Like the National Bureau of Economic Research (NBER) did, which only announced in June 2020 that back in March the U.S. economy had entered a recession due to the pandemic.
And at the same time, don't blame economists too much. Sometimes their signals are only partly false. For example, companies seeing the yield curve inverted, for example, may become more cautious and take countermeasures against a recession. And perhaps that's what has so far helped avoid disaster.
“Given that people see the yield curve invert, they take action upon it and growth slows. We potentially dodge the recession. And it looks like a false signal, when actually it's just doing its job.,” said Campbell Harvey, a Duke University professor and Canadian economist.
That said, it's worth remembering that even looking at traditional economic indicators, there are some troubling signs that can be overlooked. That the U.S. economy is on the verge of recession, Steven Pearlstein, an American columnist, realized simply by watching the market closely. He even won a Pulitzer Prize for his extensive work in predicting the 2007/2008 financial crisis.
Frosts are on the way
“It's just like a random thing that happens, you know, over and over again,” Harvard economist Jason Furman, who was chairman of the Council of Economic Advisers under former U.S. President Barack Obama, once said, arguing that predicting a recession is comparable to playing craps. And anyone who has ever been to a casino knows that no one can always guess infallibly where the lot will fall.
Of course, we can continue to joke in the spirit of Furman that “almost every recession indicator doesn't survive the next recession,” but it's still good for all investors, without exception, to know how to protect themselves from it.
And, the first thing that could be recommended to everyone is not to panic and keep a cold mind, as well as not to try to find out the new recession forecast at least in order not to feel like a tiny pawn in the world of global economy. And the second is to learn from the great ones who have long since learned the zen of investing and can survive any stock market freeze.
“Part of the forecasts on the economy, indices and individual stocks always do not come true, and 2024 is no exception, especially since from time to time new substantial information is released that changes the picture and clarifies previous forecasts. Moreover, the best times to buy and sell stocks are in times of excessive pessimism and over-the-top optimism, i.e. when most investors and forecasts are wrong. Buffett's approach is a workable option. The search for undervalued companies without critical problems justifies itself over time, the main thing is to avoid obviously speculative cases, not to take risks with “shoulders” and to observe diversification. Then, even if the portfolio temporarily shrinks due to a cyclical downturn, it will recover later - in the long term, a diversified portfolio can survive many things,” concluded Natalia Malykh, Head of Equity Analysis at Finam.
