The way the stock and bond markets have been behaving lately, the chances appear remote that the U.S. economy faces the threat of a recession any time soon.
The stock market averages and indexes have been setting record high after record high in recent months, and interest rates have been falling all year in the bond market.That simply isn't the picture analysts traditionally associate with the onset of an economic downturn, which is normally preceded by falling stock prices and rising interest rates prompted by tightening credit conditions.
"It does not appear as though there's anything about to change in a generally slowing, but still growing, economic landscape," says Greg Smith, investment strategist at Prudential Securities.
All this comes as reassurance to many people who have been worried lately about a variety of economic problems, from sluggish sales at many of the nation's retail stores to what has been widely billed as a retirement saving "crisis" as members of the baby boom generation approach age 50.
Yet recession talk persists. "The odds of a recession next year are 20 percent and likely to rise if the Federal Reserve doesn't start to ease (credit conditions) more aggressively soon," asserts Edward Yardeni, chief economist at Deutsche Morgan Grenfell C.J. Lawrence Inc.
In Yardeni's assessment, "almost all business cycle indicators suggest that economic activity peaked a few months ago."
If that's the case, why haven't stock prices tumbled in anticipation of the squeeze on corporate profits and dividends that normally occurs on the down side of the business cycle?
One important reason, most analysts agree, is that the inflation rate is low and apparently headed lower still.
As long as inflation isn't bad or getting worse, the Fed doesn't have to fight it by restraining the pace of economic activity with increases in short-term interest rates. Similarly, inflation fears don't prompt bond traders to push long-term rates higher in the credit markets.
Stock and bond investors collectively enjoy a pretty good reputation for being able to sniff out impending trouble in the economy. Occasionally, they may anticipate recessions that never materialize - as they did in the 1987 stock market crash, which was followed by no slump in the general economy.
But recessions that did occur have seldom caught the markets napping. The last documented economywide slump, in 1990-91, was heralded by Wall Street's last bear market, which bottomed out in October 1990.
So if the economy were headed for some sort of "hard landing" now, it would presumably make itself felt through some advance tremors in the stock market.
"Long business upturns now seem to be the rule rather than the exception," says Paul Boltz, financial economist at the money management firm of T. Rowe Price Associates in Baltimore.
"It used to be conventional wisdom that business expansions lasted three years or so before a recession set in. But since 1982, the economy has been in recession once, for only eight months."
"Our lengthy prosperity reflects the transition of the U.S. into a principally service economy which is inherently more stable than the goods-producing sectors," Boltz says. He also credits the Federal Reserve with having avoided overstimulating the economy into booms that bring on shortages, inflationary pressures and other conditions that in turn induce recessions.
Boltz concludes, "our current 4 1/2-year-old expansion, with a little luck, may repeat the enviable performance of the economy in the 1980s."