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Are We in a Recession Yet? It Depends on Whom You Ask

As we pass the Labor Day mark and head into the latter part of 2022, the question on many minds is whether the US economy is headed for a recession. And the question on many other minds is, “Are we in a recession already?”

It’s not surprising that confusion exists about the precise position of the US economy in the recession-expansion cycle. After all, the often-repeated standard definition of a recession is two consecutive quarters of negative economic growth. With a contraction of 1.6% in the first quarter of the year, followed by a contraction of 0.9% in the second quarter, the economy is in a recession, by the above definition.

On the other hand, a recession is typically identified with rising unemployment and falling corporate profits. In January US unemployment stood at 4% and decreased to 3.6% by March, then remained basically unchanged during the second quarter. Though currently at 3.7%--up from the 3.5% reading in July—it’s hard to make the case that we’re seeing the kind of job loss that one would typically associate with a recession. And corporate profits reached an all-time high of $2.6 trillion in the second quarter—once again, not your typical business climate during a recession.

It may help to know that economists—particularly those at the National Bureau of Economic Research (NBER)—look at a much wider range of factors than the gross domestic product (GDP) to make the determination of whether the economy is recessionary or expansionary. In fact, the definition they use allows significant room for interpretation: “[A recession] involves a significant decline in economic activity that is spread across the economy and lasts more than a few months."

Such a cautious stance may be warranted this time around. The NBER economists tend to look beyond GDP statistics to company payrolls and consumer spending. The US job market remains strong; indeed, the nation added more jobs in June than expected, and as the GDP announcement was coming out, applications for unemployment insurance had dropped. The unemployment rate is still at a historically low rate. And consumer spending, while moderating, still grew during the first six months of the year.

Nevertheless, the signs and omens are fairly clear. The Federal Reserve has signaled that it plans to continue raising short-term interest rates to tame inflation, which will curb corporate spending and generally reduce economic vibrancy. In fact, the Fed’s hawkish rhetoric at its annual Jackson Hole Symposium was apparently a large factor in recent stock market losses, as investors anticipate the negative effects on corporate earnings inflicted by higher interest rates. Meanwhile, the most popular signal for an economic downturn—an inverted yield curve—is flashing brightly. Yield curve inversions are defined as times when you can get a higher yield on short-term bond than on longer-term issues—a counterintuitive situation that signals uneasiness about the future. As of today, people can get a 2.84% annualized yield on 6-month Treasury notes, but just 2.65% a year if they buy 10-year bonds.

It’s fair to say that the outlook is uncertain. On the other hand, the outlook is almost always uncertain. Uncertainty, in fact, is an essential part of the risk-reward calculus that drives investment returns. Because it is impossible to predict precisely what the economy or the markets will do—or when they will do it—the wisest course for most investors is to hold a well-diversified portfolio of assets that accurately reflect the investor’s tolerance for risk, to rebalance periodically in order to maintain strategic alignment, and to seek professional, experienced counsel.

At Bernhardt Wealth Management, we know that the long-term success of your financial plan is vital to you. That’s why we stay abreast of the most current research and advances in portfolio management: to deliver guidance that always places the client’s interest ahead of everything else. To learn more, click here to read our article, “The Fed, the Economy, and the Financial Markets.”

Buen Camino!

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