Why hasn’t America’s long-awaited recession started yet?

The Federal Reserve raised interest rates by 5 percent in 15 months after hovering around zero since 2008. We are dealing with an economy that has been built for the past ten years on an interest rate of 0 percent, which suddenly has to deal with an interest rate of more than 5 percent.

So how is it possible that there is still no recession at the moment?

What is a Recession?

Before we dive into the current situation, it might be useful to first define the concept of recession. In principle, a recession is when we see a clear and consistent decline in consumption, incomes, output and an increase in unemployment.

Higher unemployment leads to less consumption, which drives down incomes and ultimately causes layoffs.

This would not be a good development for bitcoin at first, because people often sell risk assets for fiat money during a recession. After all, they can pay the bills with it.

This negative spiral is usually broken by central banks, which cut interest rates to stimulate the economy. As an investor, it can be interesting to time these types of periods, because in theory huge returns can be achieved.

To be able to do that, as an investor you have to keep an eye on various so-called leading indicators. That should give you an idea of ​​how close a possible recession is at the moment.

For these indicators you should think of central bank interest rates, interest rate curves (inverted yield curve), demand on the housing market, industrial production and much more. At the moment, many of those indicators are pointing towards a recession, but we haven’t seen it yet… how is that possible?

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Why is the recession delayed?

There are several factors that may contribute to the temporary absence of a recession. First, the slowing down of the impact of interest rate hikes by the US central bank. It usually takes ~12 months for the full impact of a rate hike to be felt on the economy.

Furthermore, the US economy is increasingly dependent on the services sector. Sectors such as industry and real estate are naturally more sensitive to interest rate hikes. Due to the growing dominance of the services sector, the US economy is less sensitive to rate hikes.

Due to the lower share of the industry and the real estate sector in the total economy, more damage is needed within these sectors to cause a recession.

Furthermore, US authorities have flooded the economy with capital during the COVID-19 pandemic. For that reason, consumption remains stable and the services sector is still relatively unaffected by the interest rate hikes of the Federal Reserve.

Unspent savings can even benefit from short-term US government bonds, which currently earn interest at 5 percent. For that reason, people now also earn a decent return on their savings.

This combination of factors makes the US economy somewhat more resilient to the strict policy of the Federal Reserve. A recession in the second half of 2023 is still my base case scenario, but much depends on the American consumer.

In that respect, it is interesting to keep an eye on the consumption and saving behavior of the American consumer.

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