Is This a Recession?!
An AP economic writer recently wrote the U.S. economy is in an “awkward and confusing place”. It’s easy to see signs of trouble. Stores are still beset with empty shelves. Home sales are declining although many want to buy. Consumers have been forced to commit more income to day-to-day needs like food/fuel due to spiraling prices.
All of this is reflected in the GDP numbers for the first half of the year. These growth numbers, based on the widely accepted rule of thumb, argue that the economy is in recession right now. Taking a step back, it’s important to note that every time we’ve had two consecutive negative growth quarters since 1948 an “official” recession was declared.
Who gets to make the call? The National Bureau of Economic Research (NBER) is the recognized arbiter of recessions. The NBER defines a recession not as two consecutive negative growth quarters but as “a significant decline in economic activity that is spread across the economy and lasts more than a few months.”
They look at a wider array of data than simply GDP growth, such as spending, income, employment and production. Several of their data points, especially employment, contradict the rule of thumb. With non-farm payrolls averaging 457,000 per month over the first six months of 2022, it is hard to argue that we’re in a widespread economic downturn.
The discussion above regarding the economy, in recession or not, is important but, in our view, it is subordinate to the issue of current high inflation. The Fed has committed to bring inflation back down toward their long-term target (2%), and although they’re shooting for a soft landing of the economy, they have made their priority known. That’s why the employment report on Aug. 5 and July Consumer Price Index (CPI) on Aug. 10 were extremely important.
The Fed needs to see some pullback in hiring to achieve its goal on inflation. CPI came out lower (better) than expected. This is a positive for markets moving forward. What this means is that inflation is slowing while earning, consumer spending and unemployment are still strong. This allows the Fed to slow their interest rate increases moving forward which is a positive for economic growth and for investments.
Now this is just one report. There still may be storms clouds ahead, but things seem to be improving!