Are signs pointing to rising recession risk?

The Federal Reserve (“Fed”) remains committed to controlling inflation—raising concerns over potential damage to economic growth. Is the U.S. nearing a recession? BlackRock’s equity experts weigh indicators of recession risk as policymakers take action to bring down price pressures.

The Federal Reserve’s (“Fed’s”) aggressive policy stance has raised concerns over whether a US recession is on the horizon. After several years of steady growth and low inflation, policymakers now face a delicate tradeoff between bringing down inflation or sustaining economic growth amid heightened macro and market volatility. Given the Fed’s continued emphasis on combatting inflation, a few key questions arise: how much will they need to suppress demand to reduce price pressures and what is the likelihood of a U.S. recession?

In our view, answering these questions and understanding the current macroeconomic backdrop calls for a different toolkit and more dynamic investment approach than investors have needed over the past several decades. While traditional economic reports and government statistics provide a 30,000-foot view of the economy, understanding what’s driving these headline figures can hint at where the economy is headed. As systematic investors, we use a process that transforms vast sets of unstructured data into useful investment information. This provides insights faster, at greater scale, and with more granularity than traditional reports as we navigate evolving inflation and recession risk.

Inflation continues to prompt Fed action

Throughout the economic reopening, the acceleration, or rate at which prices of goods are increasing, started to fall as consumer demand shifted back towards services. Recent stronger-than-expected inflationary data reveals an increase in the growth rate of goods inflation even with some signs of supply chain improvements and falling energy prices. Importantly, services inflation remains very strong and continues to accelerate. The falling rate of service price increases shown in Figure 1 doesn’t mean that inflation is easing, but rather that it has remained elevated over time. In our view, sustained price pressures are largely driven by services which present unique challenges to an inflation-fighting Fed.

Figure 1: Acceleration across goods and services inflation
6m inflation acceleration shown as time series (z-score)

Services inflation is particularly difficult for policymakers given that they have a limited ability to control what we view as a main driver of price pressures—labor supply. The labor shortage has remained a key production constraint since the pandemic caused many people to leave the workforce. To forecast changes in workforce participation, we monitor the volume of online job search activity across various websites in real-time. Our analysis suggests that labor supply remains roughly 10% below peak levels despite making a significant recovery from pandemic lows, as seen in Figure 2 below.

Figure 2: Job search volumes haven’t returned to peak levels
Job search intensity distance from peak from 2018 – 2022 (%)

We also measure the strength of the labor market using data from online job postings which provides a 3-6 month forecast of realized employment cost data. Earlier this year, job postings showed a reacceleration in wages that’s now being reflected in average hourly earnings data. Figure 3 illustrates that despite an anticipated moderation in wage growth in the coming months, wage pressures are likely to stay elevated and labor market tightness may persist.

Figure 3: Wage pressures remain elevated
Wage growth per income quartile

Overall, inflationary pressures remain at a level that is unlikely to spur a change in course for policymakers. We expect the Fed to remain committed to aggressive rate hikes until we see normalization of the labor market and a sustained decrease in prices, which will be challenging given the remaining strength in spending data shown in the following section. So what does this mean for recession risk?

Are we nearing a U.S. recession?

As recession concerns rise, we’re monitoring news articles and company releases for language related to job cuts and hiring freezes. As shown in Figure 4, we have yet to observe an uptick in mentions anywhere near highs seen during previous periods of declining growth such as the Great Financial Crisis and onset of the COVID-19 pandemic. Increasing mentions related to hiring slowdowns and job cuts are mainly concentrated in the technology sector and, to a lesser degree, the financial services industry. Currently, we view this as a sector-specific trend rather than a reflection of the aggregate economy. We’re watching for signs of increasing mentions across a broader set of industries that would signal growing recession risk.

Figure 4: Job cut language isn’t broad-based
Job contraction mentions across global markets

We also measure the strength of the economy using real-time consumer transaction data across different income thresholds. Given the shift in spending from goods to services throughout the reopening, zooming in on service consumption allows us to see how inflation and recession fears are impacting activity where spending has remained the most robust. While service spending for lower income cohorts is softening amid rising prices, activity remains relatively strong for middle- and high-income individuals (Figure 5). As we continue to monitor this, a broader retrenchment in service consumption across all income levels would indicate heightened risk of a near-term recession.

Figure 5: Continued divergence in service spending
Discretionary service consumption by income cohort

Navigating recession risk into 2023

Our economic indicators remain mixed as inflationary pressures remain, but stable consumer activity and labor market strength point to a low probability of a near-term recession. The latter generally aligns with market expectations that the economy will remain healthy through the start of next year. However, in our view, persistent inflation will require the Fed to raise rates more than markets are currently pricing, ultimately causing this data to worsen over time. We expect investors will face more volatility and uncertainty in the coming months as the inflation vs. growth tradeoff continues to develop.

Braving the current regime of persistent inflation, lower growth, and heightened macro and market volatility will likely require a more nuanced and dynamic investment approach than what’s been needed in recent history. This starts with using alternative data for a real-time, more granular view into how the economy and markets are evolving ahead of traditional reports. Paired with expert human insight, this information edge allows us to remain nimble during a time where dynamism matters most—navigating market complexity and uncovering opportunities along the way.

To obtain more information on the funds, including the Morningstar time period ratings and standardized average annual total returns as of the most recent calendar quarter and current month-end, please visit:

Global Equity Market Neutral Fund

The Morningstar Rating^TM for funds, or "star rating," is calculated for managed products (including mutual funds, variable annuity and variable life subaccounts, exchange-traded funds, closed-end funds, and separate accounts) with at least a three-year history. Exchange-traded funds and open-ended mutual funds are considered a single population for comparative purposes. It is calculated based on a Morningstar Risk-Adjusted Return measure that accounts for variation in a managed product's monthly excess performance, placing more emphasis on downward variations and rewarding consistent performance. The top 10% of products in each product category receive 5 stars, the next 22.5% receive 4 stars, the next 35% receive 3 stars, the next 22.5% receive 2 stars, and the bottom 10% receive 1 star. The Overall Morningstar Rating for a managed product is derived from a weighted average of the performance figures associated with its three-, five-, and 10-year (if applicable) Morningstar Rating metrics. The weights are: 100% three-year rating for 36-59 months of total returns, 60% five-year rating/40% three-year rating for 60-119 months of total returns, and 50% 10-year rating/30% five-year rating/20% three-year rating for 120 or more months of total returns. While the 10-year overall star rating formula seems to give the most weight to the 10-year period, the most recent three-year period actually has the greatest impact because it is included in all three rating periods.

You should consider the investment objectives, risks, charges and expenses of each fund carefully before investing. The prospectuses and, if available, the summary prospectuses contain this and other information about the funds, and are available, along with information on other BlackRock funds, by calling 800-882-0052 or from your financial professional. The prospectuses and, if available, the summary prospectuses should be read carefully before investing.

The performance quoted represents past performance and does not guarantee future results. Investment return and principal value of an investment will fluctuate so that an investor’s shares, when sold or redeemed, may be worth more or less than the original cost. Current performance may be lower or higher than the performance quoted. Performance data current to the most recent month end may be obtained by visiting www.iShares.com or www.blackrock.com.