A couple of months ago, I wrote a note entitled "Hard landing, soft landing or no landing at all". Since then, we have had quite a few questions about the potential of an upcoming recession. I thought it might be a good idea to focus less on the fundamentals of the economy and interest rates and more on historical numbers.

 

First, let's assume that there is going to be a recession. Historically speaking, almost all recessions are self-induced! That is, the Federal Reserve gets concerned about inflation, starts to raise rates, and keeps rates too high for too long. This in turn causes stress on the economy, which then goes into a recession. At this point, the Federal Reserve starts to cut rates and the cycle begins again.

 

If we use the above paragraph as our premise, we should be able to look at historical recessions and get an idea of when recessions start based on interest rate hikes and interest rate cuts. Using averages from the chart below, we have highlighted the three key trends to show what this would mean for the current cycle.

 

1. Recessions typically start 27 months after the first rate hike begins
   • The first rate hike of the current cycle happened in March 2022 (17 months ago). This would lead to the conclusion that, if we are going to have a recession, it should start in the next 10 months.
2. Recessions typically start 10 months after the last rate hike ends
   • The last rate hike of the current cycle (potentially, because we don't know if there will be another one yet) happened in July 2023. This would make you believe that a subsequent recession should happen in the next nine months.
3. Recessions typically start three months after the first rate cut
   • We have not experienced the first rate cut yet, but the data below suggests it should happen soon. Following the average pattern, the start of a recession would trail the rate cut by three months.

 

Source: RBC Economics

 

The interesting thing about all this recession talk is that markets tend to start going up before recessions begin. This is why some economists believe that the markets bottomed out a few months ago and the upcoming recession will start soon with a soft landing or no landing at all!

 

I have also included a piece from our CIBC Economics team entitled "When enough is enough - How to judge where the Bank of Canada sees it".

 

As always, if you have any questions, please feel free to give us a call at any time.

 

Have a great long weekend.

 

Milan