The Recession Debate

A recap from our recent client luncheon. Speakers: Todd Brand and Cliff Aque

From The Psychology of Money:

            “For reasons I have never understood, people like the hear the world is going to hell.” –Deidre McCloskey

All information is just information, and, in this recap, we hope to leave you with a sense of hope and optimism regardless of the data presented. We have all lived through a recession and survived and will likely do so again.

Recent economic headlines have centered around recession and the question of whether we are in one. While it is commonly accepted, a recession is not merely defined by two consecutive quarters of decline in real GDP. An eight-person committee at the National Bureau of Economic Research (NBER) is responsible for determining whether we are in a recession, and often do so months after a recession has begun. In addition to GDP, the committee looks at other factors including income, payrolls, manufacturing, personal consumption, industrial production, and employment.

Going back to the 1850s, the United States has experienced 34 recessions, but they have become less frequent in modern times. Since the Great Depression, there have been 14 recessions with an average span of 11 months, while expansions have averaged 64 months. That is over five years of expansion and less than one of contraction.

There are some risk indicators pointing for a recession in our current environment, including slowing retail sales and lower real wage growth, both due to inflation. However, others still point toward expansion, especially on the employment front with historically low unemployment and high job openings. In August, job openings moved up slightly against the economic consensus, to 11.2 million, still almost double pre-COVID levels, as companies seek employees for service jobs. Companies also seem to be holding on to employees in this environment. Finally, many employment factors tend to be a lagging indicator of recession, so it could take some time before the Fed’s rate hikes cool off the labor market enough to be apparent.

High worker vacancies are also keeping service prices elevated which could keep core inflation high. While prices in goods, food and energy could come down, there are still some “sticky” parts of inflation in services and shelter, which could keep inflation closer to 4% as it comes down, well above the Fed’s target of 2%. For just about everyone, inflation is causing us to adapt to a new normal. The Fed has raised interest rates 225 basis points since March, and likely will raise them another 75 at their next meeting on September 21, with two more meetings to come after that in 2022. The Fed moving rates up so quickly has led to a stronger dollar while other currencies have moved lower.  Most trade is done in US dollars which ultimately makes the situation harder on other countries as they must buy more expensive dollars to buy more expensive goods. This could continue for a while as a symptom of what is going on globally.

Although things feel bad, as evidenced by both consumer and CEO sentiment, there continues to be some strength in the economy. While inflation remains high and unemployment low, we expect the Fed to keep raising rates until inflation comes down. Chairman Powell has not backed down on his language, saying they will act “forthrightly” against inflation and that, “my colleagues and I are strongly committed to this project and will keep at it.” As soon as we see some signs of weakness in the labor markets, that could signal that the Fed will ease up on tightening, but Powell has also said that American households and businesses are in for “some pain.” Recession is not here yet, but the Fed is certainly steering us toward it. Whether or not they can successfully avoid recession remains to be seen.