Wall Street’s Recession Reversal Echoes2007’s Optimism, Warns Expert

Economic forecasters on Wall Street are nearly unanimous in having abandoned their calls for a recession, which they saw as a near-certainty just one year ago.

But this doesn’t mean the economy is in the clear. Wall Street forecasters are often wrong, and the level of complacency and groupthink is reminding one longtime market strategist of 2007.

According to Albert Edwards, a strategist at Société Générale known for his bearish takes on markets and the economy, investing professionals are letting runaway stock-market gains cloud their judgment.

“The simple fact is that recent record highs in the equity market have buoyed the economic narrative,” Edwards said. “Yet despite one or two key data points coming in surprisingly robust — particularly nonfarm payrolls and GDP — much else has looked frail.”

It’s no surprise that economists are feeling optimistic: The monthly nonfarm-payrolls report and quarterly GDP numbers are two of the most closely followed economic-data series released in the U.S., and both have consistently surpassed economists’ expectations lately.

But other, more obscure readings are sending a more alarming message, Edwards warned.

One such series is the Chicago Fed National Activity Index, which Edwards described as one of the most comprehensive measures of economic activity in the U.S. The gauge incorporates roughly 85 variables, and its below-zero reading has been consistent with GDP growth around 1% for some time.

By comparison, the official data from the Department of Commerce had the U.S. economy expanding at a 3.5% annualized rate during the second half of 2023, according to Edwards.

Survey data from the New York Federal Reserve that track consumers’ expectations about the economy and labor market also appear to contradict the official labor-market data. The survey shows that consumers’ confidence in getting another job has slumped over the past few months, particularly for those earning more than $100,000 a year.

Small businesses, which employ roughly half of Americans, have also scaled back their hiring plans, according to the National Federation of Independent Business’s small-business hiring plans. Taken together with weaker employment numbers in the Labor Department’s household survey of employment, this paints a darker picture of the labor market than the headline nonfarm-payrolls reading — which came in at 275,000 new jobs last month — would suggest.

Notably, the Labor Department’s household survey has been consistently less rosy than the establishment survey, from which figures on the number of jobs created are culled. The household survey showed that the unemployment rate climbed to 3.9% last month, compared with 3.7% in January. It’s also shown consistently weaker job creation than its sibling.

These data indicate that the U.S. economy isn’t as strong as the official GDP data would suggest. The latest reading on the pace of GDP expansion in the fourth quarter came in at 3.2%, according to the Commerce Department.

Edwards noted that other data, notably details from Institute for Supply Management (ISM) surveys, have pointed to cyclical expansion, while Wall Street strategists are sanguine about corporations’ prospects for earnings growth. However, he remains unconvinced.

Ultimately, it’s the widespread sense of complacency that Edwards finds most reminiscent of the run-up to the global financial crisis.

“All this is (dangerously) reminiscent of 2007, when all around were telling me I was wrong and should give up calling that much-delayed recession (pesky long and variable lags),” Edwards said.

Even some bullish market strategists are growing uncomfortable with investors’ unbridled enthusiasm for stocks. The latest American Association of Individual Investors poll, a popular sentiment gauge, showed more than half of respondents were bullish last week — a number the organization characterized as “unusually high.”

The main U.S. stock indexes traded mostly lower on Wednesday, with the S&P 500 SPX falling 0.2%, to 5,165.31, one day after hitting its 17th record closing high of 2024. The Nasdaq Composite COMP slipped 0.5%, to 16,177.77, while the Dow Jones Industrial Average DJIA gained 37.83 points, or 0.1%, to 39,043.32.