Recession Looms, But Are We There Yet?

By Tim Courtney, Chief Investment Officer

The market has been speculating about a recession over the last several months, and after a crucial week of economic reports, talk of a recession is growing louder. The second quarter, like the first quarter, saw the gross domestic product (GDP) shrink in real terms.

The National Bureau of Economic Research (NBER), a nonprofit group of economists, ultimately determines the start and end of a recession based on the definition of a significant decline across the economy lasting more than a few months.¹ However, the NBER will often declare a recession several quarters after it starts, sometimes after it actually ends. Amid this uncertainty, there are three indicators we are watching closely.

• Consumer Confidence: On Tuesday, the latest consumer confidence survey showed a third-consecutive month of decline, down to 95.7, a 2.7 point decline from June, and the lowest since February of 2021.² Consumers are concerned about skyrocketing inflation, rising gas and food prices, persistent shortages and supply chain problems, coupled with the threat of a recession. Consumer sentiment is near an all-time low as well, but spending remains fairly strong.
• Interest Rates: Wednesday, the Federal Reserve (Fed) raised rates another 0.75%,³ marking the fourth rate hike in the last five months. The move comes after inflation continued to soar in June, reaching a 40-year high of 9.1%.⁴ While the Fed is working to fight inflation, eight of the last nine times the Fed raised interest rates to combat inflation, a recession resulted.⁵
• GDP: During the first quarter, we saw a GDP decline of 1.6%,⁶ and on Thursday, second-quarter GDP data showed a decline of 0.9%.⁷ Although two consecutive quarters of negative GDP readings is often considered to be the key indicator of a recession, it isn’t a hard and fast rule and won’t automatically trigger the NBER to declare a recession.

Despite these concerns, not all signs point to a recession. For the last four months, unemployment has remained at 3.6%, a 40-year low, with the U.S. adding 2.5 million jobs since the start of the year. That, coupled with strong consumer spending, adds to the complexity of the NBER’s decision.⁸

Regardless of whether a recession happens now or several months down the line, it will eventually happen in this economic cycle that has been so compressed – a peak, deep contraction, magnified recovery and inflationary slowdown in just over two years.

Thankfully, banks and households are much better capitalized than they were during the last non-pandemic recession of 2008-2009. Additionally, the market has already accounted for a certain level of economic and earnings contraction. If you have questions about how a recession may be affecting your assets, please contact your Exencial advisor.

Sources:

1. National Bureau of Economic Research (as of 7/26/22) — Business Cycle Dating
2. The Conference Board (7/26/22) — Index Fell for Third Straight Month, as Consumers’ View of Present Situation Weakened
3. U.S. News & World Report (07/27/22) — U.S. Federal Reserve Delivers Second Super-Sized Rate Hike
4. The Washington Post (6/13/22) — June inflation soared 9.1%, a new 40-year high, amid spiking gas prices
5. The Hill (7/22/22) — Rising interest rates foreshadow Biden’s recession
6. CNBC.com (7/26/22) — The numbers show the U.S. economy is at least teetering on a recession
7. CNBC.com (7/28/22) — GDP fell 0.9% in the second quarter, the second straight decline and a strong recession signal
8. The Hill (7/26/22) — Why another GDP decline may not mean the US is in recession

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