Key Questions: Are We in a Recession?
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Such a question is an academic debate with staunch supporters of both positions. Economic growth is cooling, and financial conditions are tightening. Markets, therefore, will continue to be volatile requiring investors to be patient and selective when putting capital to work.
Fifty years ago this December, one of the greatest (and most controversial) plays in the history of the National Football League took place. With 30 seconds to play in an AFC playoff game, and his team trailing the Oakland Raiders by one point, the Pittsburgh Steelers’ future Hall of Fame quarterback, Terry Bradshaw, threw a pass to teammate John Fuqua.
Bradshaw’s pass was either tipped off Fuqua’s hands or the helmet of a Raiders defender and ricocheted back toward Steelers’ fullback Franco Harris, who scooped it up close to the ground and ran for a game-winning touchdown.
Sports enthusiasts argue about that play to this day. Did the ball touch Fuqua? Did it hit the ground? Either scenario would have resulted in an incomplete pass. But instant replay was not used to review plays then and while the game referees did consult multiple sources, ultimately they declared that Harris’ touchdown and the Steelers’ victory counted.
Later that day, the play was immortalized as “The Immaculate Reception” by legendary Pittsburgh sports announcer Myron Cope. In his view, the Steelers’ victory was a miracle and one whose very occurrence was under great doubt and in much dispute.
The "Immaculate Recession?"
Similarly, many in the financial media today are clamoring over the notion of a recession with some pronouncing that it has already arrived.
Yet others contend that conditions typically associated with recessions are not apparent and challenge assertions that we are in a recession. Even a well-known pop star recently inquired: “When y’all think they going to announce that we going into a recession?”
Might this be the economy’s “Immaculate Recession?” As they say now in football, “Let’s review the tape.”
Those who argue for recession most often use the measure of two consecutive quarters of negative Gross Domestic Product (GDP).
In the first quarter of 2022, the US economy fell by 1.5%, a noticeable decline from the prior quarter, which registered a gain of nearly 7%.
Since then, econometric models1 indicate that the decline extended into the second quarter. If these models prove accurate, the economy would have contracted for two consecutive quarters.
A Different View
Almost exactly one year ago, we introduced our readers to an enigmatic group of economists known as NBER – The National Bureau of Economic Research.2 We discussed how NBER (the official arbiter of when a recession begins and ends) relies on three criteria – depth, duration and diffusion or how deep, how long and how widespread is economic weakness.
More plainly, NBER states that its definition of a recession “involves a significant decline in economic activity that is spread across the economy and lasts more than a few months.”3
Notably, NBER does not mention two consecutive quarters of negative GDP reports. Furthermore, GDP is commonly viewed as an inefficient measure of the economy. Instead, employment trends are seemingly a far more important barometer for evaluating the strength of the economy. And on that front, recent trends generally remain positive.
Whether we are in a recession, however, may be missing the bigger point: A recession is inevitable. It is a normal part of the business cycle. When it will arrive and, more importantly, how severe it will be, is unknowable. It is likely, however, that the next recession may be less severe relative to others because most of the excesses that fueled the post-pandemic boom were cyclical in nature – not structural as the housing bubble burst of the mid-2000s was.
It is also worth contemplating that the financial markets may have already done enough to slow down the economy with respect to housing and high-beta “spec stocks.” That could cause the Federal Reserve to raise rates less aggressively as currently forecasted.
Still, much depends on inflation, something the Federal Reserve has signaled that it will aggressively combat by raising interest rates, so much so that it could be tightening into a slowdown, a risky proposition that will likely keep the markets under some pressure for some time.
Based on this week’s inflation report, prices are rising at uncomfortable rates implying the Fed will not be slowing down soon. In fact, inflation in June was so hot that interest rates might be going up faster than previously expected.
Also, should another energy shock emerge, the economy is probably not strong enough to withstand such pressures, thus hastening the recession’s arrival.
In the end, with economic growth slowing and financial conditions tightening, we believe investors should be selective when putting capital to work. Over the past several months, we have advocated for maintaining a slightly defensive stance, while remaining steadfast in our commitment to owning high quality companies and securities.
The debate over whether or not we are in a recession will surely persist, and inevitably a recession will materialize. But history has shown that expansions last far longer than recessions and investors have generally been rewarded for their time in the market versus timing the market.
For more information, please contact your advisor.
About George Mateyo
As Chief Investment Officer, George Mateyo is responsible for establishing sound investment strategies for private and institutional clients, expanding internal and external research capabilities, and managing the delivery of solid risk-adjusted investment performance.
In previous roles, George spent more than 15 years in investment management and investment consulting, where he acquired firsthand knowledge and insights into the capital markets and the stewardship of investment portfolios for institutional and high net-worth investors.
George received his MBA from the Weatherhead School of Management at Case Western Reserve University and completed additional studies at the London School of Economics.