Sedona Arizona

You call THIS a recession?

What defines a recession?

Well, the answer depends on who you ask.

A Google search of the definition is currently returning all sorts of interesting results. For example, the Wikipedia definition has a disclaimer right at the top of the page that explains this particular article “may be affected by the following current event: Increased political debate in the United States.

We live in interesting times.

Fueling the political part of the debate, the White House recently offered this statement:


WHRecessiondef

Ignoring politics, is the above statement economically and academically correct?

Traditionally, recessions have been called when GDP growth declines for two consecutive quarters, signaling an economic slow down. We now have an early release of data to know GDP growth declined in the first AND second quarters of this year:


gdp2q22advchart01

Other economic indicators

While two consecutive quarters of economic slow down is the marker for a recession, GDP alone is not the only indicator. Usually a slow down in economic activity (GDP decline) also includes factors like slowing consumer demand and higher unemployment.

Consumers still appear to be spending, although that spending has shifted from stuff to experiences. Unemployment is historically low, though we are starting to hear about layoffs – especially in big tech companies.

In fact, consumers are still spending and unemployment is historically low at the same time inflation has shot up. In the same period, the capital markets (stocks and bonds) have experienced one of the worst first-half draw downs on record.

I’ll give the White House a partial pass on their statement. Here’s why…

Zooming out a little further, we can look at other economic indicators to get a read on where we might be economically. The below chart from Clearbridge’s Anatomy of a Recession provides a good visual:


Anatomyofarecession

A quick read down the June 30, 2022 column shows a mixed bag of indicators. A comparison to the prior periods may suggest weakening among several of the 12 indicators.

Retail sales are flashing caution. Wage growth has been all but negated because of high inflation. US ISM Manufacturing New Orders Index is at a current level of 49.20; it was at 55.10 last month, and came in at 66.00 one year ago. That’s a month-over-month change of -10.71% and -25.45% from last year.

The Fed is raising rates, which reduces money supply. A tighter money supply might be good for some parts of the economy and bad for others. Good because we’re not printing money and therefore inflation should come down. Bad for anyone needing to borrow money or service existing debt (ehem: credit card holders, the US Government, etc).

Hence, the partial credit to the White House, as it’s actually quite likely the two most recent consecutive quarters of negative growth may indicate a recession. Fed Chair Powell said in his statement this week that the committee sees many parts of the economy are still healthy. Therefore, he wouldn’t call this a recession.

Maybe he’s right. Or, maybe he’s trying not to spook the markets by hinting at a recession while also announcing a rate hike.

The National Bureau of Economic Research (NBER) will make the official call on whether or not we have entered a recession… a few months from now.

It’s not always a textbook set up

If we are in a recession, the setup and current conditions may be one of the weirdest ones ever.

With the recent Fed policy decision to raise rates an additional 75bps, the Fed funds target range is now roughly where it was prior to the pandemic. If the Fed pauses here, inflation could persist.

If the Fed increases from here, they could send us into a non-debatable recession. Maybe not a deep and prolonged one, but a recession nonetheless.

Either way, we have to focus on what we can control and that begins with how we respond to changing economic conditions.

Want to talk about how a recession might impact your financial and investing decisions?

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Author: Dale Shafer II, CFP®, APMA®, CDFA®

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