The first announcement for GDP data came out last week and was negative. This appears to be the definition of a recession - 2 consecutive quarters of negative GDP data. Are we in a recession and why has a recession not been called? We have some answers to those questions below.
The drop in second-quarter GDP activity will be reviewed and revised two more times this quarter. The National Bureau of Economic Research (NBER) is responsible for analyzing the data and making official recession calls. The NBER doesn’t change a recession call once it’s made, so they need to have a high degree of confidence in the supporting data.
It is important to note that GDP is only one factor that defines a recession. Historically, recessions occur with high unemployment. As you can see from the chart below, unemployment numbers are at an all-time low of 3.6% as of June 2022.
Strong Corporate Earnings
While not all industries are thriving, industrial production rose at a 4.8% annual rate in the first quarter and at a 6.2% rate in Q2. Additionally, payrolls grew at a monthly rate of 539,000 in the first quarter and 375,000 in Q2.
Since the 1990s, corporate profits have advanced at nearly double the rate of GDP growth. Clearly profits have been growing much faster than the economy.
According to the Bureau of Economic Analysis, consumer spending jumped in June of 2022 by 1.1%, a significant uptick from the 0.2% recorded in May. The data reveals that consumers are spending, however they are doing so more strategically, - cutting out unnecessary spending to afford food and fuel while inflation remains high.
What Does The Stock Market Say?
The S&P 500 tends to bottom before a recession ends. If you think back to 2020, stocks bottomed in March of 2020 and the recession ended in April 2020. Although the last recession was not declared over until 15 months later - that is the average amount of time since the 1970s it has taken for the NBER to declare that a recession is over.
Markets are forward looking and have moved up 12% since June 16th when they hit their recent low. If we are in a recession, we believe it will be very shallow. Stocks have historically bounced back strongly from big 2-quarter drops and shallow recessions. In fact, after a more than 20% drop over 2 quarters (the S&P 500 Index fell 20.6% in the first half of 2022), the average gain the next 2 quarters has been 21.5%.
Regardless of whether we are in a recession or not, what we do know is unemployment is near an all-time low, corporate earnings and consumers are strong, and stocks have historically shown us how they bounce back after 2 big quarter drops.
It may be easier now to understand why a recession has not been called. The National Bureau of Economic Research, the “official” arbiter of recessions, uses a wide range of data and intricacies to assess and truly understand whether the economy is shrinking or not.
If you have questions or would like to discuss your own financial planning or investment strategy needs, we welcome you to Contact Us to set up time to discuss further.
Bureau of Labor Statistic, United States Department of Labor via Data Commons
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