Key Questions: Is the Recession Over? And Why Does It Feel Like Christmas Came Before Halloween This Year?
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It would be wrong to conclude the recession is over because it hasn’t actually begun. But mercurial consumers are causing uncertainty, which almost certainly could cause many market pundits to be wrong.
Last week, the Bureau of Economic Analysis reported that the US economy grew at an annualized rate of 2.6% for the third quarter, which ended Sept. 30. For many, this was welcome news. The growth represented a re-acceleration from the first and second quarters, when the economy contracted by 1.6% and 0.6%, respectively.
Two negative quarters have commonly been viewed as evidence that the economy has fallen into a recession, and given the recent rebound, some are asking, “Is the recession over?”
To us, a broad and deep economic contraction (i.e., a recession) has not yet occurred. Hence, it would be out of sequence to ask if it has ended. As we have argued throughout this year, declaring a recession is more nuanced than merely observing two consecutive quarters of economic declines. We won’t discuss this in greater detail again, but in brief, with the labor market still rather strong and unemployment near historic lows, it would be wrong to state that the US economy is currently in a recession.
That said, the latest reading of the US economy revealed some strains. Consumer spending (by far the biggest driver of the US economy) grew, but at a slower pace relative to the prior quarter. Additionally, business spending fell, and residential investment fell at an annual rate of over 26%, highlighting substantial weakness in the US housing market. On the other hand, exports were a bright spot, growing 14%, paced by oil and natural gas. That’s reflective of America’s prominence as a major energy exporter, although this segment is highly volatile.
More importantly, gross domestic product (the summation of all economic activity) is a lagging indicator; thus, it is essential to look forward. When doing so, the weakness in housing needs to be taken seriously, given its role in influencing consumer behavior. Similarly, while the employment picture remains relatively sunny, some skies are darkening. As a result, storms may form in 2023, which I’ll discuss later in this article.
Cracks in Technology Demand?
Also last week, several major technology bellwethers reported earnings that revealed cracks starting to form in demand for their products and services. While certain companies are facing idiosyncratic risks, the general theme has been a pullback in spending from businesses and consumers alike. In particular, ad spending among business customers has begun to wane, just as consumers have moderated their spending, too, as evidenced by the results delivered by a large online retailer.
That said, another well-known technology company reported healthier results, buoyed by a higher-end customer base and a new product cycle.
In light of these mixed results, several large employers are turning an eye to headcount. Such consideration of reducing headcount may serve as an early warning sign of the storm clouds referenced previously, given the size of their collective payrolls. The previously referenced retailer, for instance, employs approximately 1.6 million people, twice the number it employed two years ago, and 18 times the number of employees on staff 10 years ago.
In other words, it would be fair to assume that a slowdown in consumer spending will eventually trigger a slowdown in employment and possibly a reduction in the labor market, and thus, most likely, a recession. And the odds of that occurring in 2023 have risen.
At the same time, there is still a significant amount of uncertainty to the outlook. The large online retailer I mentioned earlier forecasted that its operating income for the current quarter could range anywhere between zero and $4 billion, an extraordinarily wide range. Surely (and hopefully) the company has a more precise internal range of outcomes it chose not to publicize, the public report highlights the vast ambiguity in today’s economy.
In a similar vein, ever since Labor Day, I’ve been struck by holiday merchandise strewn across the aisles of many in-store retailers. When attempting to make sense of why it felt as if Christmas was coming before Halloween this year, several retailers have reported having “too much of the stuff customers don’t want, and not enough of the stuff customers do want.”
In other words, the mercurial nature of US consumers is a vexing challenge.
As noted previously, uncertainty typically breeds more uncertainty. But while it is commonly assumed that most investors hate uncertainty, one of my favorite financial journalists recently reminded me that investors instead should hate certainty. “The more certain a prediction sounds, the more you should doubt its validity,” he noted1.
Therefore, we continue to believe investors should focus on what they can control, avoid succumbing to the illusion that accompanies forecasts of precision, and instead develop a plan and adhere to the plan as uncertainty intensifies.
Note: a special thanks to Connor Cloetingh for his assistance with this article.
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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.