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By definition, an economy is considered in recession when it experiences two straight quarters of declining GDP. According to new data Thursday, the U.S. economy shrank by 0.9 percent last quarter, after falling 1.6 percent the quarter before. The White House’s message on the economy has shifted over the last few months. A few months ago, the standard messaging was that the economy is growing, and a recession isn’t going to happen. Then, as inflation continued rising and the economy responded, the message became, that the GDP might be shrinking, but the economy is still strong. Now that there is clear evidence that matches the definition of a recession, though, the White House message has again shifted to outright denying that two quarters of GDP contraction even counts as a recession. White House Press Secretary Karine Jean-Pierre, for example, said “That’s not the definition,” when asked if the U.S. was in a recession considering back to back quarters of negative GDP growth. According to Joe Biden’s own chief economic advisor, as well as virtually every economist over the last half century, this is the definition of recession. While the White House might be playing semantic games, it doesn’t change the economic reality.

So are we in a recession, or not?

If you’re confused about whether the US economy is in a recession, you’re not alone.

On one hand, gross domestic product, a key measure of economic output, shrank for the second straight quarter this week, raising fears that the country has entered — or will soon enter — recession territory. On the other hand, the job market remains very strong, telling us the economy is still robust.

Some economists call two consecutive quarters of contraction a technical recession. And with good reason: 10 out of the last 10 times the US economy shrank for two consecutive quarters, the US economy was declared to be in a recession. But massive job losses occurred during seven out of the past seven recessions, and that’s not happening now.

There’s no steadfast rule governing what defines a recession in the United States. Instead the official designation is determined by eight economists who serve together on the Business Cycle Dating Committee. The group works under the umbrella of the National Bureau of Economic Research (NBER), a private nonprofit organization. It has yet to use the “recession” label.

They abide by a relatively vague definition that allows for wiggle room: A recession, they write, “involves a significant decline in economic activity that is spread across the economy and lasts more than a few months.”

What Is A Recession?

There is no universal definition for an economic recession, but analysts and investors commonly define it as two consecutive quarters of negative gross domestic product (GDP).

By that metric, we are already in one. The U.S. GDP contracted at a seasonally-adjusted annual rate of 0.9% in the second quarter of 2022, after dropping by 1.6% in the first quarter of 2022.

This is why you’ll hear many pundits, especially in an election year, argue that a recession has commenced.

But, the National Bureau of Economic Research (NBER) is officially tasked with identifying U.S. recessions, and its definition of a recession is somewhat vague. The NBER says a recession is “a significant decline in economic activity that is spread across the economy and that lasts more than a few months.”

For instance, the Covid Recession lasted just two months, well below the two-quarter marker.

Jeffrey Roach, chief economist for LPL Financial, says the keyword in the NBER’s recession definition so far in 2022 may be “significant.”

“A slowdown has to be significant, broad and sustained before it qualifies as a recession,” Roach says. “Currently, the economy is downshifting to a much slower growth path, but the decline in economic activity is not ‘significant’ in our view.”

Roach points out U.S. companies are still hiring and consumers are still spending. The U.S. economy added 372,000 jobs in June, far exceeding economist estimates of 250,000 new jobs. That type of job growth doesn’t typically coincide with a U.S. recession.

In addition, analysts still expect S&P 500 companies to report 4.3% earnings growth and 10.1% revenue growth in the second quarter.

If the NBER ever decides to confirm conventional wisdom that the economy is in a recession, and when they would decide to do so, is anyone’s guess.

Everyday Americans, of course, care little for such technicalities when prices are rising so quickly and financial markets are struggling.

Why Are Americans Worried About A Recession?

After years of lockdowns and restrictions, many observers hoped pent-up demand would generate a post-pandemic economic boom in 2022. Instead, Americans are worrying about inflation and recession. What happened?

Inflation and Supply Chain Disruptions

Supply chain disruptions in Asia and economic sanctions against Russian oil and gas have exacerbated the U.S. inflation problem that began in 2021. The Federal Reserve also underestimated how aggressively it would need to act to bring inflation under control.

The BEA recently reported the Personal Consumption Expenditures (PCE) price index rose 6.3% year over year in May. Core PCE—the Fed’s preferred measure of U.S. inflation—was up 4.7% from a year ago.

While core PCE growth is down slightly from peak levels of 5.3% in February, it remains near multidecade highs last seen in the 1980s.

Consumers are feeling the brunt of increased costs for everyday goods and services. The Bureau of Labor Statistics reported on July 13 that the consumer price index (CPI), a measure of the cost of living, soared by 9.1% from last year. The fast rise in CPI is another inflation warning not seen in four decades.

So are we in a recession, really? It’s hard to say. But here’s why we may be. And why we may not be.

Inventories

Business inventory problems play a key role in the swings of the economy, and a large chunk of the economic contraction we saw last quarter came from companies slowing the expansion of those inventories. Last year, businesses stocked up on goods to get ahead of supply chain woes and in anticipation of post-Covid consumer demand, but now they may be overstocked.

GDP contracted at an annual rate of 0.9% in the second quarter, but a slowdown in inventory accumulation removed a whopping 2 percentage points from output. That means the economy would have grown if companies weren’t culling their stockpiles. It also signals that consumer demand could be weakening, another sign of a recession.

Jobs

The labor market has remained a source of strength for the economy and the shining beacon of hope among those who believe the United States can avoid a recession.

As of June, 98% of jobs lost during the pandemic had been recovered. Unemployment has remained at its historic lows in 2022, and the US economy has added 2.2 million jobs since January — nearly the fastest growth on record.

In May, there were about two open positions for every job seeker, along with historically low levels of layoffs. The economy is creating almost 400,000 jobs a month, and paychecks in June were also growing. That doesn’t look like a normal recession.

Inflation & rate hikes

Inflation is at historic highs in the United States, and it’s eating into consumer spending power.

US consumer prices surged to a new pandemic-era peak in June, jumping by 9.1% year-over-year, according to the most recent data from the Bureau of Labor Statistics. That’s higher than the previous reading, when prices rose by 8.6% for the year ending in May.

Accordingly, money is tight in many US households: New data from the Bureau of Economic Analysis shows Americans are saving much less than they did a year ago. In May, Americans saved just 5.4% of disposable personal income, down from 12.4% year-over-year.

To counter white-hot inflation, the Federal Reserve has approved a series of supersized interest rate hikes this year. Higher rates keep prices in check by slowing the economy down. But the Fed is walking a narrow line. In the 11 times the Fed raised rates, the Fed has successfully avoided recession only three times. During each of those cycles, inflation was lower than it is today. That has made some analysts and market participants nervous about a potential recession.

Consumer sentiment & spending

Consumer spending, the largest part of the US economy, is rising. That’s a good sign for the economy. Household spending grew in June by 1.1%, up from a revised 0.3% increase in May, the Commerce Department reported on Friday.

That growth, however, could be the result of rising inflation. Overall, Americans are growing pessimistic about the economy.

The Conference Board Consumer Confidence Index decreased in July for the third straight month. About 43% of 3,000 respondents said they think there’s a greater than 50% chance that the US will fall into a recession in the next 12 months, while just 13% said that in April.

Yield curve

The shape of the yield curve, which plots the return of Treasury securities, is one of the most reliable indicators of the health of the economy, and it has been flashing signs of a looming recession for most of July.

An inverted yield curve is often seen as a signal that investors are more nervous about the immediate future than the longer term, leading interest rates on short-term bonds to move higher than those paid on long-term bonds.

Fed Chair Jerome Powell on Wednesday said that he does not think the economy is currently in recession, but yield curves say something else. They’ve moved into an “inversion” in the past few weeks.

A yield curve inversion has preceded every single recession since 1955, according to research from the Federal Reserve Bank of San Francisco.

Are We in a Recession? Here’s What the Experts Say

The U.S. economy contracted for a second straight quarter in Q2 according to the latest GDP data, sparking plenty of recession chatter around Wall Street.

U.S. gross domestic product contracted 0.9% in the second quarter, following a decline of 1.6% in Q1. Although two consecutive quarters of negative growth don’t constitute the official definition of a recession, economists and strategists remain split on whether we’re in an actual downturn or not.

Which is fair enough. It’s nigh impossible to call a recession in real time when the economic cycle hasn’t been rocked by years of exogenous shocks. But this time around? Suffice to say the global pandemic and Russia’s invasion of Ukraine have conspired to create largely unprecedented macroeconomic conditions.

Indeed, the economy these days is just plain weird. Just look at how it’s generating all sorts of contradictory data. The labor market, in particular, sure doesn’t look recessionary. The economy created 2.7 million jobs in the first half of 2022. An ultra-low unemployment rate of 3.6% likewise doesn’t square with an economic slump. And then there’s consumer spending, which remains surprisingly robust.

No wonder the experts are confused.

It’s also important to know that Thursday’s GDP report was a preliminary estimate only. The data will be revised twice in order to get to a final reading. And lastly, let’s not forget that the official arbiter of recessions is the National Bureau of Economic Research. Two consecutive quarters of economic contraction might look, sound and smell like a downturn, but we’re not in a recession until the NBER says so.

With economic conditions perhaps more confounding than ever, it seemed like an especially good time to check in with a range of economists and strategists. And so we’ve excerpted some of their commentary on the Q2 GDP print below:

“Insisting upon the precise definition of recession will be an even more fraught task in light of the unequivocal deterioration in economic activity reflected in today’s 0.9% contraction in Q2 real GDP. Yet real consumer spending continued to forge ahead and the job market still has legs. It is too early to call the end of this expansion, but the hour is fast approaching.” – Tim Quinlan, senior economist at Wells Fargo Securities
“While this morning’s GDP reading marks two negative quarters of GDP growth, we’ll push back on the notion that we’re in a recession. The first quarter was marred by a widening trade deficit due a surge in imports. This quarter a slowdown in inventory accumulation tipped GDP growth into the red. Neither of these readings provide much of an indication to the strength in the underlying economy. Personal consumption grew for the eighth straight quarter. Looking at the gains in spending alongside continued strength in payrolls, it’s really difficult to call what we’re experiencing right now a recession.” – Cliff Hodge, chief investment officer for Cornerstone Wealth

“Recession has arrived. Back-to-back quarterly declines in real economic activity are not part of the NBER determination of a recession – but the reality is that we have never before seen this condition without there being a recession. Waiting for the NBER to make the official declaration is nutty, since it generally waits more than six months after the downturn started when it publishes the announcement. The decay is evident and the leading indicator from the Conference Board, down four months running, points to more economic pain ahead. The labor market is the next shoe to drop.” – David Rosenberg, founder and president of Rosenberg Research

“The back-to-back contraction of GDP will feed the debate about whether the U.S. is in, or soon headed for, a recession. The fact that the economy created 2.7 million payrolls in the first half of the year would seem to argue against an official recession call for now. But the more important point is that the economy has quickly lost steam in the face of four-decade high inflation, rapidly rising borrowing costs, and a general tightening in financial conditions. The economy is highly vulnerable to slipping into a recession. That might discourage the Fed from ramming through another large rate hike in September. However, until inflation subsides, further rate hikes are in the cards. And they clearly won’t reduce the odds of a real recession.” – Sal Guatieri, senior economist at BMO Capital Markets
“While GDP declined for the second consecutive quarter, the official definition of recession is a judgmental mix of levels and rates-of-change across several variables, most of which continued to expand in the first half of the year.” – Jan Hatzius, chief economist, Global Investment Research Division at Goldman Sachs
“Businesses added to inventories more slowly, which, like in the first quarter, was a drag on GDP. Without this inventory effect, real GDP growth in the second quarter would have been positive. The second quarter saw big headwinds to growth from nondurable goods spending as consumers pulled back in the face of higher gas and food prices. Nonresidential and residential investment in structures was another big headwind due to continued supply and labor shortages and higher long-term interest rates. While it seems inaccurate to think of the first half of the year as a recession, the outlook for the second half and into 2023 is dicier.” – Bill Adams, chief economist for Comerica Bank
“The second consecutive negative GDP growth rate is raising significant alarms, as that is often how a recession is classified. However, these numbers do not show the full picture. The White House Council of Economic Advisers points to other key indicators, such as the continued strength of consumer spending and job growth in the first half of the year, as positive signs that we are not in a recession. As we are closely monitoring all factors, I expect the unemployment rate to remain below 4% throughout the second half of 2022, buying the Fed time to reduce inflation without triggering that recession.” – Steve Rick, chief economist at CUNA Mutual Group

How Bad Could the Next Recession Be?

The chances of a recession ticked higher last week, driven by the Federal Reserve’s latest rate hike and hawkish forward guidance.

The good news: If it does come to pass, a recession today is likely to be shallower and less damaging to corporate earnings than recent downturns. Here’s why.

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Inflation-Driven vs. Credit-Driven Recessions

Aside from the pandemic-induced 2020 recession, other recent recessions have been credit-driven, including the Great Financial Crisis of 2007-2008 and the dot-com bust of 2000-2001. In those cases, debt-related excesses built up in housing and internet infrastructure, and it took nearly a decade for the economy to absorb them.

By contrast, excess liquidity, not debt, is the most likely catalyst for a recession today. In this case, extreme levels of COVID-related fiscal and monetary stimulus pumped money into households and investment markets, contributing to inflation and driving speculation in financial assets.

The difference is important for investors. Historically, damage to corporate earnings tends to be more modest during inflation-driven recessions. For example, during the inflation-driven recessions of both 1982-1983, when the Fed raised its policy rate to 20%, and 1973-1974, when the rate reached 11%, S&P 500 profits fell 14% and 15%, respectively. This compares with profit declines of 57% during the Great Financial Crisis and 32% during the tech crash.

Fundamentals Are Stronger

Beyond historical trends, several economic factors point to a less severe recession, should one come to pass:

The housing and auto industries are strong. Housing prices have been high and resilient, while inventories are tight and could fall even further with higher interest rates. For autos, production rates are below prior peaks due to semiconductor shortages. As supply chains clear, order backlogs could keep manufacturing activity uncharacteristically high for a recession.
Labor-market dynamics remain robust. Not only is the labor market tight, as defined by unemployment rates, but it is also showing record-high ratios of new job openings to potential applicants. This suggests that, rather than laying off current employees, companies may first reduce their open job postings, potentially delaying the hit to unemployment.
Balance sheets are in the best shape in decades across households, companies and the banking system. Moreover, catalysts for corporate capital spending appear strong, given current needs around energy infrastructure, automation and national defense that are not directly linked to the business cycle nor the Fed’s actions.
Corporate revenues may be more durable. Today’s stock-index composition shows a growing share of earnings attributed to recurring revenue streams, as more companies build subscription- and fee-based models.

In short, we are positive about the economy’s fundamentals and believe they can provide ballast in the event of a recession. Nonetheless, the bear-market bottom for stocks may still be 5%-10% away. Investors should remain patient and consider using tax-efficient rebalancing, including by harvesting losses, to neutralize their major overweight and underweight exposures. And, as we continue to emphasize, pursue maximum asset-class diversification.

This article is based on Lisa Shalett’s Global Investment Committee Weekly report from June 27, 2022, “Inflation-Driven Recessions are Different.”

Should You Be Worried About a Recession?

If the U.S. does slip into a recession sometime this year or in 2023, there’s no reason for investors to panic.

First off, recessions don’t historically last very long. The average duration of a U.S. recession since World War II is just 11.1 months, and the Covid-19 recession in early 2020 lasted just two months.

U.S. recessions are also fairly common. Since World War II, there has been about one U.S. recession roughly every five years.

While recessions can lead to job losses and other financial difficulties for Americans, they have historically been excellent buying opportunities for long-term investors. It can be extremely difficult for investors to time a market bottom perfectly, and stocks tend to bottom several months before a recession when peak pessimism is reached.

But some stocks even have a track record of performing relatively well during recessions. For example, Target (TGT), Walmart (WMT) and Home Depot shares significantly outperformed the S&P 500 during the 2020 and 2008 recessions.

Conclusion

EWverybody on the right knows what we need to do to reverse our economic woes, but unfortuantely we are not in power. So we have to deal with the left’s botched plans for economic recovery.

Mortgage rates have doubled in the last six months. Consumers are paying more to tap credit lines than at any time in over a decade. Lenders are setting aside cash as they brace for a wave of corporate defaults. And layoffs are slowly ticking up.

As the Federal Reserve prepares to deploy another supersized interest rate hike Wednesday, its inflation-fighting campaign is already ripping through the economy, slowing down business activity and sparking fears that the U.S. is tipping into recession just two years after it emerged from the last one.

The Fed is just getting started in trying to rein in the worst spike in prices in four decades. Yet the moves it has made to squeeze growth so far — combined with investor expectations that it will go even further — are having the desired effect now.

“People are getting ready for the storm,” said Som-lok Leung, executive director of the International Association of Credit Portfolio Managers, which represents lenders.

Here’s a rundown of some of the fallout from the Fed’s actions and where we are headed:

Broke businesses

Banks overwhelmingly expect a surge in corporate defaults, a survey from Leung’s group shows. Rock-bottom interest rates during the pandemic helped many companies lock in cheaper debt, meaning the prospect of bankruptcies is not as dire as it might have been.

Still, about 600 larger companies that employ more than a million workers could be at risk of default if the Fed carries out its plans for raising borrowing costs, based on figures from the Swiss bank UBS. Under a much less conservative estimate, that number could reach 1,300, potentially affecting the livelihoods of more than 3 million people.

“The higher the Fed goes, the closer we get to a severe credit cycle,” said Matt Mish, head of credit strategy at UBS.

Weaker tech businesses face particularly strong headwinds since they rely more on regular infusions of cash, and many have seen their stock prices plummet as rates have risen.

Andrew Park, a senior policy analyst at the progressive Americans for Financial Reform, said a lot of companies also failed to take advantage of the debt binge during the pandemic to make productive investments, citing private equity-owned firms that borrowed money to pay dividends to shareholders.

“When you have all this corporate debt that’s been issued, what happens is, it’s less of an immediate implosion and more of a drawn-out process where the debt becomes an amplifier” to any recession. That’s because people lose their jobs and income, which further dampens economic activity.

Housing: Out of reach for many

Mortgage rates have surged above 5 percent, making the prospect of buying a home even more prohibitively expensive for first-time buyers who were already facing soaring prices. That’s cooling off the red-hot housing market, a key channel for the Fed in its fight against inflation because it affects rent, family wealth and employment.

Builders have begun pulling back from new construction; housing starts fell 8.1 percent in June after dropping 9 percent in May, which is leading to job losses and could exacerbate affordability problems in a market that’s already lacking supply.

Homes on average are still selling above the price they’re listed at, but that could change soon, and asking prices are starting to fall, said Daryl Fairweather, chief economist at Redfin. A lot of homeowners are satisfied with the low rates they got last year, which has prevented prices from dropping significantly because they’re in no rush to sell, Fairweather said. But if mortgage rates stay high and the economy enters a recession, that could lead to more distressed sales.

Doug Duncan, chief economist at housing giant Fannie Mae, said if inflation reaches 10 percent, that could bring average mortgage rates to 6 percent, which would be an intense pain point for the market.

“If the market concludes, ‘they’ve really lost control,’ then I think you can see rates go up further,” he said. But he doesn’t yet expect that to happen.

Will the labor market break?

Job growth has been by far the most positive trend in the economy as the U.S. has emerged from the depths of the pandemic. The economy added a net 372,000 jobs in June, a surprisingly rapid pace given that the unemployment rate already sits at 3.6 percent. But the labor market is showing signs of cracks in the face of higher rates; wage growth is decelerating and jobless claims have reached their highest weekly level since mid-November.

Ideally, the Fed would bring down inflation without significantly hurting wage growth. But the harder the central bank hits the brakes on the economy, the more that will hurt hiring and lead to layoffs and pay cuts.

The Fed is moving quickly to slow the economy before households and businesses start to expect higher inflation to continue indefinitely, a key psychological driver of rising prices.

This dynamic means that supply shortages are particularly irksome for the Fed, because they’re not in its control. The longer inflation takes to come down to the central bank’s 2 percent target, whether because of excessive spending or because of bottlenecks, the harder it may be to tame.

Don’t put it on the card

The average annual rate for a new credit card is up 1.3 percentage points from last year, an unusually large increase that is the biggest since 2011, according to Bankrate. Unlike mortgages, which are often long-term and fixed-rate, card rates tend to move up alongside the Fed’s moves.

Households still don’t have concerning levels of borrowing overall, said Curt Long, chief economist at the National Association of Federally-Insured Credit Unions, but their debt burdens could quickly grow. Total consumer credit was up 7.3 percent in May compared to a year before.

“A lot of that recent debt is coming in at much higher rates than consumers expected,” he said. “When you pair that with what we’ve been observing with inflation, especially for things that consumers don’t really have a choice on whether to purchase or not … they’ve got to buy gas. They’ve got to buy groceries.”

Borrowers with longer-term loans like mortgages can actually benefit from inflation, which decreases the value of the amount they initially borrowed.

Still, “I’m not sure if people in that situation see themselves as really benefiting from what’s happening out there,” Long said.

The muscular dollar

The rise in U.S. interest rates has boosted the dollar’s value against other major currencies such as the euro, which is now roughly at parity with the U.S. currency.

That makes it cheaper for Americans to buy foreign goods, which is good news for consumers, but is also a drag on economic growth, since a larger trade deficit subtracts from GDP measurements. It also makes paying off debt more expensive for developing countries that borrowed in dollars, hurting global growth.

Resources

Themorningwire.com, “The Recession Is Here.”; kiplinger.com, “Are We in a Recession? Here’s What the Experts Say: The U.S. economy contracted for a second straight quarter in Q2 according to the latest GDP data, sparking plenty of recession chatter around Wall Street.” By Dan Burows; cnn.com, “So are we in a recession, or not?” By Nicole Goodkind and Tal Yellin; morganstanley.com, “How Bad Could the Next Recession Be?” By Lisa Shalett; forbes.com, “Is The U.S. Headed For Another Recession?” By Wayne Duggan; politico.com. “How the Fed’s inflation battle is already slamming the economy: The Fed is just getting started in trying to rein in the worst spike in prices in four decades.” By Victoria Guida;

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