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The fake business cycle strikes again. In 2022/2023, the market was lured into the recession narrative by a weakening sentiment in various cyclical gauges such as the ISM Manufacturing. Classic recession models are designed to try and use the cyclical momentum to assess the health of the broader economy 6-12 months later but the problem is that the cyclical economy is increasingly irrelevant for the economy.

When we look at our proxy of the recession model from the Federal Reserve system, it is evident that it is closely connected to, and even lagging, the ISM Manufacturing gauge. Now that Manufacturing is showing signs of green shoots, the conclusion will evidently be that the recession risk is increasingly off the table, which might not be the correct conclusion given the 4-5x importance of the service economy.

Chart 1: Recession models = manufacturing