How were so many economists wrong on whether we’d have a recession? Northern Trust’s Ryan Boyle points to 3 culprits

How did so many economists get the recession signals wrong?

It wasn’t so long ago that the world (as well as the media) was awash in recession predictions, stock market crash predictions, doomsayer narratives. Now here we are, with many investors and certainly CFOs feeling pleased but puzzled as the economy continues to bounce along.

Ryan Boyle, chief U.S. economist for Northern Trust, tackled the topic recently, highlighting widely followed “recession red flags” that turned out to be false flags. Boyle writes that economists “have developed a series of basic signals that can be harbingers of a downturn. Their track record was never perfect, but they have really failed us during the past two years.”

The three culprits?

GDP

Boyle writes that there were in fact two consecutive quarters of contraction in U.S. real GDP in the first half of 2022 which is the textbook definition of recession. However, “a broader evaluation of employment, industrial production, and spending painted a different picture,” according to Boyle. “Business cycle daters declined to declare a downturn, and their stance was justified when one of the negative GDP quarters was revised into positive territory.”

The yield curve

An inverted yield curve—where long-term rates fall below short-term rates—is a market watcher’s five-alarm fire, and every postwar recession has been preceded by one. But here, as Boyle writes, “the curve turned upside down in 2022, and the expansion is still going strong.” He adds that the “spread has remained positive since early September. Just this week, the 3M-10Y spread also returned to positive territory, without a recession yet.”

Temporary Help

“Falling levels of temporary help are also thought to be a bad omen,” Boyle writes. “When employers look to reduce headcount, they will usually start by cutting the temps and contractors…often followed by reduction of full-time employees. Temporary employment has been declining since early 2022, but a reduction in permanent employment has not followed.”

This indicates to him that “more people are taking temp jobs because they want to, not as a last resort.” He added to me via email that the “Sahm rule”—coined by economist Claudia Sahm, who found that if the unemployment rate gains 0.5% from its previous year’s low, a recession is imminent—was “triggered with July’s employment report, but then switched off in October as the unemployment rate stayed below July’s 4.3% reading. That’s not typical.” He explained that usually, “once employment starts rising, it keeps going upward. This appears to have been the Sahm Rule’s first false alarm.”

I asked Boyle with these signals having misfired, what he’s watching in the months ahead. His answer: any signs of distress in the labor market.

“Even as inflation and shortages made the economy feel distorted, consumers remained confident in their job prospects, and they kept spending,” he told me. Going forward, “I am most attuned to layoffs. We have seen very low levels of turnover as employers have held onto their workers.”

“Layoff announcements could turn the tide,” Boyle added. “Even workers who keep their jobs may become more cautious about spending, slowing down consumption.”

The recession watch conversation reminded me of a funny moment last year when I was interviewing economist Austan Goolsbee on stage at the University of Chicago. I had asked him what he saw coming in the year ahead. His answer amused me. “Why do people keep asking economists to predict the future?” he said. “We can’t even predict the past.”

The next CFO Daily will be in your inbox on Friday, Dec. 27. Happy Holidays.

Lee Clifford
Lee.Clifford@fortune.com

The following sections of CFO Daily were curated by Greg McKenna.

Leaderboard

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